Public Law and Private Power. Corporate Governance Reform in the Age of Finance Capitalism . Ithaca : Cornell University Press ( 2010 ), 304 p ., ISBN 978-0-8014-4904-8
Quiet Politics and Business Power. Corporate Control in Europe and Japan . Cambridge : Cambridge University Press ( 2010 ), 248 p ., ISBN 978-0-521-11859-0
The politics that drive corporate governance (CG) reforms in industrialised countries have become an important topic in comparative politics and political economy at least since Mark Roe’s seminal book (Roe 2003). He develops the thesis that insider-orientated corporate governance systems, where large shareholders have close ties with managers and monitor them directly, emerge as an investor reaction to strong social democratic parties. Social democratic power explains hence cross-national differences in corporate governance. John W. Cioffi and Martin Höpner’s (2006) proposed a ‘partisan’ theory based on the ‘political paradox of finance capitalism’, which states that – contrary to Roe’s claim – in many countries during the 1990s social democratic parties were the driving force of shareholder-orientated reforms. Social democratic power favoured hence the emergence of outsider CG systems, which are characterised by the absence of large shareholders, the disciplining of corporate insiders by (financial) markets and the existence of hostile takeovers. ‘Coalitional approaches’, constitute a third group of theories, which consider that coalitions between interest groups representing labour, capital and managers, not political parties, explain a given corporate governance outcome (Gourevitch & Shinn 2005).
Two recent books, by John W. Cioffi and Pepper Culpepper respectively, make important contributions to this ongoing debate about what political factors determine different structures of corporate control across countries. Both books explicitly address recent research on institutional change in comparative political economy; in particular theories of institutional change as rule-taker driven and incremental processes (Streeck & Thelen 2005; Mahony & Thelen 2010). However, the two books contribute in quite different ways to this literature.
Cioffi’s main contribution is to draw our attention to the increasing importance of ‘regulatory politics’ in an era where legal rules become more and more. He focuses therefore on top-down – i.e. rule-maker driven – processes of institutional change, which have recently been somewhat marginalized in favour of bottom-up processes.
Culpepper on the other hand takes the precise opposite view, reaffirming the importance of not only considering formal legal rules (formal institutions), but also informal institutions in order to fully understand the politics of corporate governance.
The books use hence two fundamentally different approaches. Yet, they reach in part quite similar conclusions. Importantly, both authors rehabilitate in some sense out-of-favour ‘punctuated equilibrium’ concepts of institutional change underscoring the importance of periodic crises in making quite radical change possible (Cioffi 2010: 137; Culpepper 2011: chapter 7). It is therefore interesting to compare the two studies in order to understand how their different paths lead to partly similar conclusions.
Cioffi adopts a broad definition of corporate governance as a ‘juridical nexus’ of company law, securities law and labour relations law, which determines the rights and responsibilities of different stakeholders. This definition leads him to put formal legal change centre stage and to stress the primacy of politics in CG reforms. In his view, state actors and political parties not interest groups drive CG change. The above-mentioned ‘political paradox of finance capitalism’ is placed as a quasi-axiom at the centre of the explanation. Indeed, Cioffi sees the business elite and their political allies in the centre-right parties as the main opponent to shareholder-orientated reform and the centre-left as its main driving force (e.g. p. 22).
Extending and updating his earlier works on CG reforms in the US and Germany, he presents in detail the two country’s diverging CG systems (chapter 3) and retraces meticulously the political reform processes since the 1980s (chapters 4 and 5) and in the aftermath of the Great Financial Crisis of 2008 (chapter 6). The book covers hence in part well-known ground, while applying the theoretical framework also to the most recent post-crisis reform processes. It is thus a very useful and topical book, which also revises some common places about both US and German CG and about the role that CG played in the Financial Crisis.
Its main ambition and great merit – besides the empirical richness – is the consistent effort to ‘take law seriously’ and to attempt a synthesis of comparative law and comparative political economy approaches (chapter 2, pp. 47ff). Cioffi stresses the constitutive role of law in establishing corporate governance regimes, but also in shaping actors’ identities, incentives and norms. This constitutive role of law leads him to argue that the legal rules adopted during the era of ‘Finance Capitalism’ create their own politics (p.12). This is in line with classical works in political science (Schattschneider 1963), but resonates also strongly with one of Culpepper’s (2011) central claims. Indeed, it is regarding this point that there is a fundamental agreement with Culpepper’s analysis, despite otherwise quite stark contradictions.
At different levels, Pepper Culpepper’s approach constitutes a direct challenge to Cioffi’s law- and politics-centred approach. Firstly, Culpepper states that not party politics or interest group coalitions, but the preferences of managerial organisations determine corporate governance outcomes (p.3). He stresses the relative irrelevance of political parties in the process of CG reform due to the specificity of CG as a topic. Secondly, contrary to Cioffi’s theory, managers are not conceived of as being invariably against pro-shareholder reforms. They may support such reforms when pro-shareholder reforms provide managers with new business opportunities, which compensate for the relative decline in autonomy due to increased shareholder influence. Managers are most likely to perceive such opportunities in countries were firm-level organised labour is weak, because in such cases managers are relatively free to restructure companies and extract ‘shareholder value’. This leads Culpepper to expect managers to be favourable to pro-shareholder reforms in countries with weak works councils such as France and Japan, but to oppose such reforms in countries with strong works councils such as Germany and the Netherlands. This expectation is borne out by the evidence presented.
One of Culpepper’s major contributions to the study of the politics of corporate governance, however, is to show that corporate governance reforms may follow a very different ‘logic’ than other policy fields. Regarding this aspect, his claims are quite compatible with Cioffi’s argument about the specificity of the politics of finance capitalism. The main dimensions of a policy field that Culpepper distinguishes are the degree to which voters care about an issue (what he calls political salience) and the degree to which an issue is governed through formal or informal institutional arrangements. In this respect, although focusing exclusively on the question of hostile takeovers, Culpepper’s definition of corporate governance is broader than Cioffi’s. Culpepper stresses the importance of including ‘informal institutions’ and corporate practices in the definition of corporate governance (chapter 2), while Cioffi explicitly defines corporate governance as a ‘juridicial nexus’ (chapter 2). While Cioffi sees the politics of corporate governance reform hence mainly as a political battle fought in the parliamentary arena, Culpepper proposes a more complex conception of CG reform. Indeed, the two dimensions – salience and degree of formality –determine a ‘governance space’; a two-by-two table of four quadrants, each of which follows a particular political logic. Corporate governance is mostly an issue of low political salience – because issues are technical, complex and ‘boring’– and often regulated by informal institutions rather than formal legal rules. CG issues fall hence often into the low-salience/informal corner of the two-by-two governance space. Culpepper argues that in such a situation, politicians have few incentives to intervene, because they do not have the necessary expertise and their constituencies do generally not care about these issues anyway. Under these conditions of ‘quiet politics’, managerial interest groups have major advantages over other actors in determining the type of rules that will prevail. This is due to their expertise and to their financial- and lobbying power. Due to the deference that both politicians and journalist pay to them, managerial organisations gain access to the decision-making process through expert committees and can influence media coverage if needed.
The empirical chapters of the book, which analyse the struggles over takeover protections and the emergence of a market for corporate control in France, Germany (chapter 3), the Netherlands (chapter 4) and Japan (chapter 5), illustrate indeed that managerial organisations usually get what they want in the area of corporate control.
Business power declines however even in the realm of corporate governance, as soon as politics become ‘noisy’ (i.e. more salient). This was the case in the US following the different corporate scandals of the early 21st century. The failure of Enron in 2001 undermined the business elite’s claim to legitimate expertise and voters started to care about corporate governance related issues, notably managerial pay. Culpepper shows in chapter 6 on executive pay regulations in France and the US that under conditions of high salience a possible shift from the arena of self-regulation to the parliamentary arena may make it much more difficult for business to get what they want. Indeed, in the formal arena, the sources of their power – expertise, lobbying and influencing media coverage – prove less effective. In particular, following corporate scandals or economic crises the ‘structural power’ of business may be weakened to a point where other actors get a chance to impose their preferences against business preferences. To be sure, managers remain a powerful interest group; but they compete with other interest groups and politicians on more equal terms. In contexts of high salience political parties start to matter and the best managerial organisations can do is to seek political allies and influencing media coverage to tilt public opinion in their favour (p.176). The outcome of such attempts are much less certain then using their expertise and lobbying capacity in the informal arena and under conditions of low salience.
The main claim of the book is hence that under conditions of ‘quiet politics’ business interests tend to get their way. However, at times the fundamental claim that business wins unless the public cares – while generally plausible and supported by the evidence – seems too limited to account for all historical instances. It seems for instance fully conceivable that other interest groups may challenge the managerial monopoly on legitimate expertise on corporate affairs even in the informal and low salience sphere.
Thus, during the Fordist era trade unions’ expertise on work-related issues was considered legitimate in many countries, sometimes even by managers themselves. To be sure, the legitimacy of trade unions’ expertise has radically declined over the last decades. Yet, during the ‘corporatist era’, it would seem that the managerial monopoly of legitimate expertise was not as unchallenged as Culpepper suggests. Indeed, the existence of works councils in certain countries shows precisely that other stakeholder groups than managers were deemed to have legitimate knowledge about the governance of firms.
The question of works councils hints also at the fact that cooperative institutions among social partners seem difficult to explain using the ‘quiet politics’ framework. Culpepper suggests that the informal arena the only way business power can be disciplined is when an issue’s salience is high (e.g. wage bargaining). In this case, the threat of state intervention will discipline business interests and lead them to accept compromises with trade unions (see chapter 7). However, it is much more difficult to explain why cooperative arrangements – such as works councils – can be found in the informal arena even when salience is low or state intervention is not a realistic threat. The framework seems to rely on a conception of interest groups as ‘distributive coalitions’, which pursue their selfish interests in a context of ‘zero sum games’. Yet, interest groups can also cooperate in order to solve collective action problems. In the latter case, business power or the threat of state intervention may not be the main determinants of the outcome, but institutional arrangements may be the result of a ‘coordination game’.
A second aspect where Culpepper’s theory, while highly efficient and elegant, seems to have difficulties to account for the empirical reality concerns tensions within the business elite. In particular, the rise of financial interests as another powerful interest group within the business elite, which increasingly challenges (manufacturing) managerial expertise is only marginally treated. To be fair, Culpepper does refer to the importance of financial interests when comparing the German employer association BDI, where financial interests are not represented, with the French MEDEF where they are (chapter 3). Nevertheless, Culpepper's conceptual framework where the only way to challenge business power is through increasing salience or following a corporate scandal, does not accommodate easily with such internal tensions. His framework may indeed reflect a particular historical situation rather than a universal law of capitalism. This historical dimension of the argument is not explicitly addressed in the book.
It is regarding this aspect that Cioffi’s book makes a major contribution. Cioffi’s argument is explicitly limited to the context of post-Fordist ‘Finance Capitalism’ and shows how a particular historical era gives rise to its own politics. Cioffi puts the tension that ‘finance capitalism’ creates between industrial and financial capital at the centre of the ‘new politics’ of corporate governance. The specificity of the era of finance capitalism is – according to him –, that the tripartite alliance between managers, capital providers and conservative parties that underpinned the Fordist model has been destabilized due to increasing conflicts between capital and management. This has led most conservative parties to ally with the industrial managerial elite, which in turn created an opportunity for centre-left parties to ally with capital and garner thus the support of a growing middle class (pp. 35–6).
Cioffi’s account probably over-stresses the tensions between managers and pro-shareholder activists and the ‘political paradox’ thesis does clearly not apply in all cases. Culpepper shows indeed that in some cases there may be congruence between what managers want and what investors want and that centre-left support for shareholders is not a universal feature of corporate governance reform. Similarly, recent research by Krier (2005) stresses the increasing ‘fusion’ of financial and managerial interests in the era of Finance Capitalism. Yet, the increasing autonomy of financial interests from industrial interests still is a crucial characteristic of the post-Fordist growth model. Culpepper’s conception of ‘business power’ seems to rather underestimate the challenge that this ‘competing expertise’ may pose to the power of the industrial business elite.
Be that as it may, both authors stress that different policies give rise to different politics and make room for bridging seemingly irreconcilable theories of institutions change in political science.
Culpepper suggests that low salience might be the reason why certain institutions follow paths of incremental change, while high salience issues are more likely to follow more radical, ‘punctured equilibrium’ patterns of change that are driven by electoral politics (chapter 7). The book’s great merit is hence to develop a concept that makes it possible to bridge different strands of theories of institutional change (incremental vs. punctured equilibrium models; interest group politics vs. median-voter theories).
Cioffi adds to this the importance to consider finance capitalism as a particular historical phenomenon, which produces its own interest groups, identities and ultimately politics. Pointing to the importance of regulatory politics, he makes a strong case for taking law seriously and integrating hence comparative law and comparative political economy.
Taken together the two books constitute a timely and useful corrective of recent scholarship that increasingly stressed rule-taker driven and incremental processes of institutional change. While the latter constitute an important addition to institutional analysis in political economy, Cioffi and Culpepper remind us that this might only be part of the story. The struggles over formal institutional rules are an important aspect shaping national business systems and deserve attention. In particular, perhaps unsurprisingly given the current context, both authors very much stress the role that scandals and crises play in undermining otherwise powerful managerial interests and making thus more radical patterns of formal change possible.