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s adverse selection. The third governance function is tomonitor and influence the performance of firms and their compliance with rules of behavior.When companies are mismanaged and underperform, mechanisms are needed to recognizethe problem and take corrective action.
These basic functions are carried out by various institutions, which can be groupedinto four major types: (1) boards of directors, protecting the interests of constituenciesand monitoring the performance of managers; (2) banks and other financial institutions,gathering information as part of their credit management process, structuring financialcontracts that constrain company behavior, and monitoring performance; (3) information
intermediaries, such as accounting firms, securities analysts and ratingagencies, improvingthe flow of information to outside providers of resources; and (4) laws and regulatory bodies(including government agencies, legislators, and self-regulatory organizations), establishing
rules and monitoring compliance.The role of these institutions varies considerably from country to country. Fig. 1 illustratesimportant differences across the three major corporate governance models. The most commonmodel is the business group-based system of corporate governance. In some countries,business groups are organized around families, while elsewhere they might pivot arounda bank or a large industrial enterprise, or a combination thereof (e.g.Granovetter, 2004).While there is tremendous variation among business groups, the focus in their governance ison protecting the interests of stable, inside shareholders. This is often cemented in extensive
4 This framework has its roots in a functional perspective of the global towards a more market-based system. The functional model, as sketched in Fig. 1, suggests
three large directions of change, that combine in a shift away from the focus on direct
management interference through banks, and towards more emphasis on information and
monitoring. The three “change arrows” suggest three areas that can be quantitatively and
qualitatively analyzed:
(1) Disintermediation and growth in the market for corporate control: As large companies
see new options in external financing, they can diversify their sources of funding.
Evidence of this can be found in a decline in bank loans in the external financing of
large firms, and a growing use of market instruments such as bond and stocks. This in
turn should result in a growing number of firms listed on stock exchanges. Concurrent
with the shift toward direct financing by firms, we should observe a shift in investment
strategies by households, away from savings deposits and life insurance contracts, and
towards equity, bonds, and investment funds.
Moreover, as large firms diversify their sources of funding, they become subject to
the forces of the bond and stock markets. This should lead to an increase in mergers and
acquisitions and a decline in stable and block shareholdings, as corporate ownership
becomes more disperse.D.B. Crane, U. Schaede / International Review of Law and Economics 25 (2005) 513–540 519
(2) The development and growth of a market for information: For companies to raise funds
directly on the market, they need to disclose more information to potential investors
in a globally accessible form. A shift towards more market-based transactions requires
a shift towards more detailed accounting information, and an incr