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tion flow and manage problems that result from
asymmetric information, such as adverse selection. The third governance function is to
monitor and influence the performance of firms and their compliance with rules of behavior.
When companies are mismanaged and underperform, mechanisms are needed to recognize
the problem and take corrective action.
These basic functions are carried out by various institutions, which can be grouped
into four major types: (1) boards of directors, protecting the interests of constituencies
and monitoring the performance of managers; (2) banks and other financial institutions,
gathering information as part of their credit management process, structuring financial
contracts that constrain company behavior, and monitoring performance; (3) information
intermediaries, such as accounting firms, securities analysts and rating agencies, improving
the 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 illustrates
important differences across the three major corporate governance models. The most common
model is the business group-based system of corporate governance. In some countries,
business groups are organized around families, while elsewhere they might pivot around
a 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 is
on 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 financial system; see Merton (1995) and
Crane, Froot, Mason, et al. (1995). The Global Corporate Governance Project at the Harvard Business School has
extended this functional perspective to systems of corporate governance.
D.B. Crane, U. Schaede / International Review of Law and Economics 25 (2005) 513–540 539
from what some Germans refer to as the “cold capitalism” of the US. However, international
financial markets and global competition will continue to challenge domestic protectionism;
the EU will continue to push for uniform regulations, with “the market” being the most
likely smallest common denominator across the Union; and an aging society will push
more households towards diversified investments for retirement. The German system has
moved away from the banks, and global pressures on large firms and banks will continue
to undermine domestic political resistance against change.
Acknowledgements
The authors acknowledge financial support of Russell Reynolds Associates and the Division
of Research of the Harvard Business School.We are grateful for comments from Harald
Baum, Hideki Kanda, R. Thillainathan, participants at the HBS Finance Seminar and the
Harvard Business School Conference “Corporate Governance: A Functional Approach”,
and two anonymous reviewers.
References
Ahmadjian, C. (2003). Changing Japanese corporate governance. In U. Schaede & W. Grimes (Eds.), Japan’s
managed globalization: Adapting to the 21st century (pp. 215–240). Armonk, NY: M.E. Sharpe.
Baums, T., & Fraune, C. (1995, March). Institutionelle Anieger und Publikumsg