Comparative CG 2023-2024 (max 3 pages, stapled, font size 10, line spacing 1; keep margins)

First Name: Riccardo Last Name: Baratieri

Collective good problem: problem to monitor a company in a systematical way. BoD is the controlling body representing the
shareholders, they control, appoint, and monitor top mngmt, which in turn has to report to the BoD. Upper Echelon theory:
theory that considers the characteristics of the people that compose the top mngmt, and tries to explain why these
characteristics change and influence the decisions that the company makes. This approach focuses on the people, while CG
focuses more on the rules imposed by CG codes. When there is dispersed ownership in a company mngmt is not controlled at
all. This was the situation in the early 2000s and up to the Financial Crisis of 2007-2008. A shareholder could rely on the BoD
to control mngmt, but then the same question could rise again, who controls the controllers, meaning the BoD, so that they
will not collude with the top mngmt. CG is the design of institutions that induce or force mngmt to internalize the welfare of
stakeholders. Another definition is that CG is the whole set of legal, cultural and institutional arrangements that determine
what publicly traded corporations can do, who controls them, how control is exercised, and how the risk and returns from
the activities they undertake is allocated. There are different responsabilities that the BoD has to take care of: ratification and
monitoring are the most important ones. Mngmt focuses on initiation and implementation. There are differences in CG
systems around the world. Some aspects of the external side of CG are: legal, culture, business system relat issues, and
country, markets, finan sector. Aspects of the internal side of CG are:
• One-tier board (6-8 weeks job per year) vs Two-tier board (2 weeks job per year): the main difference is that in the first
case control is exerted by non-executive directors that reside in the same body that makes strategic decisions, while in the
second case there are two separate boards, one for mngmt and one for oversight (in a two-tier board we have two main
types of actors, executives/mngmt on one side, and supervisory board members/non-executives, while in a one-tier board
the executives and non-executives are all in one board);
• Chairman and CEO duality: a situation in which the Chairman of the BoD is also the CEO of the company;
The theory that explains how CG changes and is organized can be viewed under two approaches:
• Agency approach: the key issue is the separation of ownership and control. The top mngmt cannot be completely
controlled, but there are strategies to monitor executives and align their interests with those of the shareholders through
incentives schemes such as bonuses or stock options. The principal wants to maximize the ROI, while the agents want to
maximize private returns like empires and high salaries;
• Institutional approach: in this case institutions are viewed as set of formal and informal rules of social order and
cooperation governing the behavior of two or more individuals. The options avaialable when we do not like something are:
exit (leave for another similar relation with a higher quality  USA), voice (raise the voice and try to negotiate a better
situation within the existing relation  Germany), loyalty (keep the observations for yourself and stay where you are 
China). The institutional theory approach is too generic since: strong focus on national institutions, marginal attention to
different actors and their interactions, marginal attention to interaction among institutions within a country, and marginal
attention to specific institutions and how they work out at the firm-level;

Aguilera and Jackson, The Cross-National Diversity of CG: Dimensions and Determinants

CG concerns "the structure of rights and responsibilities among the parties with a stake in the firm". The two main models of
CG are Anglo-American/liberal market economy (short-term equity finance, dispersed ownership, active markets for
corporate control, strong shareholder rights, and flexible labor markets) and Continental European/coordinated market
economy (long-term debt finance, ownership by large block-holders (concentrated ownership), weak markets for corporate
control, and rigid labor market). This classification only partially fits other realities (ex. Japan, East Asian countries) and the
challenge remains to explain cross-national diversity and the key factors explaining these differences. In this paper CG is
examined in terms of 3 stakeholder groups: capital, labor, and mngmt. First part is about key dimensions that describe the
variations in the identities and interests of each stakeholder toward the firm. Then, cross-national diversity in terms of
institutional configurations that shape how each stakeholder group relates CG is explained. The main themes are (1) how a
country’s property rights, financial system, and interfirm networks shape the role of capital, (2) how a country's
representation rights, union organization, and skill formation influence the role of labor, and (3) how a country's mngmt
ideology and career patterns affect the role of mngmt. The model described uses actor-centered institutionalism in stressing
the interplay of institutions and firm-level actor (it bridges the gap between undersocialized AT (agency theory) approaches
and oversocialized views of institutional theory). AT is an undersocialized view of CG, while institutional theory is an
oversocialized view of CG. Due to the separation between ownership and control, various mechanisms are needed to align
the interests of principals and agents. Shareholders try to maximize returns, focusing on high dividends and rising stock
prices. Managers prefer to grow profits (empire building may bring prestige or higher salaries), may be lazy or fraudulent, and
may maintain costly labor or product standards above the necessary competitive minimum. Agency costs arise because
shareholders face problems in monitoring mngmt: they have imperfect information to make qualified decisions, contractual
limits to mngmt discretion may be difficult to enforce, and shareholders confront free-rider problems where portfolios are
diversified, thereby reducing individual incentives to exercise rights and creating preference for exit. Comparative CG is
usually conceived of in terms of the mechanisms available to minimize agency problems. AT leaves 3 gaps in comparative
research. First, AT overlooks the diverse identities of stakeholders within the principal-agent relationship. Second, AT
overlooks important interdependencies among other stakeholders in the firm because of its exclusive focus on the bilateral
contracts between principals and agents (CG is the outcome of interactions among multiple stakeholders). Third, AT retains a
thin view of the institutional environment influencing CG. Social relations are the fundamental unit of analysis in CG. Where
institutional environments are nationally distinct, isomorphic processes drive CG practices to become more similar within
countries and to differ across countries. The authors view institutions as influencing the range of effects but not determining
outcomes within organizations. The model focuses on how the role of each stakeholder toward the firm is shaped by
different institutional domains and thereby generates different types of conflicts and coalitions in CG. CG is defined as the
relationships among stakeholders in the process of decision making and control over firm resources. At the firm level our
model focuses on 3 critical stakeholders: capital, labor, and mngmt.

Capital in the CG equation: capital is the stakeholder group that holds property rights (shareholders) or that otherwise
makes financial investments in the firm (creditors). Concentrated ownership leads to stronger external influence on mngmt
while fragmentation tends to pacify shareholder voice. There are 3 dimensions along which the relation of capital to the firm
varies: (1) if capital pursues financial or strategic interests, (2) the degree of commitment or liquidity of capital's stakes, and
(3) the exercise of control through debt or equity. Financial interests are pursued by individuals and institutional investors,
they want high ROI, strategic interests refer to control rights (banks and corporations). A second dimension of capital
concerns the degree of liquidity or commitment. Liquidity refers to the ability of owners to exit by selling their stakes without
a loss of price. In contrast, commitment involves dependence on firm-specific assets to generate returns, as well as the ability
to control appropriation of those returns (commitment is related to increasing ownership concentration). The third
dimension involves the distinction between equity and debt. Creditors are risk averse and favor stable corporate growth,
owners face larger residual risks and possess greater control rights, but lose control during bankruptcy and they prefer debt
to equity (they don’t want to dilute their shares). There are 3 institutional dimensions of capital: property rights, type of
financial system, and interfirm networks. In countries with property rights predominantly favoring large (minority)
shareholders, capital tends to pursue strategic (financial) interests toward the firm and exercise control via commitment
(liquidity). The two major alternatives for financial mediation between households and enterprises are bank based or market
based. In countries with predominantly bank-based (market-) financial systems, capital tends to exercise control over the
firm via debt (equity) and commitment (liquidity). Network multiplexity: overlap of networks of capital ties (ownership and
credit) with other business ties. Multiplex ties reinforce the commitment of capital by making exit more costly, given a high
degree density of relationships between firms (ex. Japan). US/UK firms have much looser networks and tend not to build as
many multiplex relationships due to antitrust regulation. In countries with a high (low) degree of multiplexity in interfirm
networks, capital tends to pursue strategic (financial) interests toward the firm and exercise control via commitment
(liquidity).

Labor in the CG equation: the CG largely neglects employees. This omission partly reflects weak employee participation in
the US relative to that in economies such as Germany or Japan, where labor participation is politically important and often a
source of competitive advantage. Rules limiting managerial authority can be created through many sets of functionally
equivalent mechanisms (shop floor-level job control, collective bargaining, multiempower collective bargaining, and labor
law). The model focuses on two dimensions defining employees' influence on decisions: (1) strategies of internal
participation versus external control and (2) portable versus firm-specific skills. External influence can be channeled through
collective actions (ex. strikes) and employee representation is "independent" of mngmt and preserved in strict separation
from cooperative institutions that engage labor in firms' decision making. There can also be internal channels of decision
making to codetermine mngmt actions (more democratic decisions). When employee skills are portable across firms or
investments in skills are low, employees may favor exit over voice in response to grievances. Conversely, when employee
skills are firm specific, their greater dependence on the firm makes the option to exit more difficult. The authors argue that
the degree of internal participation/external control and portable/firm-specific skills within the firm is shaped by three sets of
institutions: (1) the representation rights given to workers, (2) the organization of unions, and (3) the institutions of skill
formation. An institutional setting with weak representation rights (US), does not provide internal channels to represent
employees within firms' decision making. Institutional settings characterized by strong representation rights (Germany),
provide formal internal channels to give labor a voice in the firm's decision making by providing legal rights to information,
consultation, and codetermination in key decisions. In countries with predominantly strong representation rights, labor tends
to pursue strategies of internal participation. In countries with predominantly weak representation rights, labor tends to
pursue strategies of external control. Union organization generally can be differentiated along 3 ideal types: (1) class, (2)
occupation, and (3) enterprise models. In countries with predominantly class-based (enterprise-based) and craft-based
unionism, labor tends to pursue strategies of external (internal) control. Skill formation directly affects CG, because the
portability or firm-specific nature of skill investments influences the relation of employees to the firm. A landmark
comparative study identifies five main skill formation institutions that provide skills: (1) state provision, (2) free markets, (3)
institutional companies, (4) firm networks, and (5) corporatist associations. In countries with predominantly market- (firm-)
and state-based skill formation institutions, labor tends to acquire portable skills (specific skills) and to pursue strategies of
external (internal) control.
Mngmt in the CG equation: there are 2 dimensions of managers’ identities and interests in relation to the firm (1°: autonomy
vs commitment, 2°: financial (strong separation of strategic and operational mngmt, firm control via financial mechanisms) vs
functional orientation of managers (a greater integration of operational functions, either through technical specialization or
through strong personal involvement and leadership)). Autonomous managers experience a large degree of independence
from specific relationships within the firm. These managers may find it easier to "make tough decisions" or to impose
hierarchical control in the firm. Committed managers are dependent on firm-specific relationships to pursue their interests.
Ideology is an institutional variable that influences mngmt both by imposing constraints as taken-for-granted world views and
by creating normative expectations that become "focal points" for firm decision making. In countries where managerial
ideologies legitimate generalist knowledge (scientific specializations) and/or hierarchical decision making (consensual
decision making), mngmt tends to have greater autonomy (commitment) in relation to the firm and a financial (functional)
orientation. Career patterns reflect the complex incentives and opportunities for top managers' mobility (closed labor
markets vs open labor markets). In countries with predominantly closed (open) managerial labor markets, mngmt tends to
have greater commitment (autonomy) to the firm and a functional (financial) orientation.

Conclusions: the article explains why CG changes across countries by identifying 3 key stakeholders' relationships to the firm
and the institutional domains shaping these relationships. Institutional differences matter through their capacity to support
different modes of interaction among stakeholders at the firm level. Conversely, different modes of interaction between
stakeholders will place distinct demands on the national institutional setting. The impact of any single institution on
stakeholders (ex. property rights on capital) is contingent on the influence of other institutional domains (financial systems
and interfirm networks) on capital. Consequently, countries with identical institutions in one domain will not necessarily have
identical CG to the extent that other institutions will yield countervailing effects. Institutional complementarities refer to
situations in which the viability of a certain institution increases in the presence of another institution. Complementarities
may help generate comparative institutional advantages but may also lead to inefficient lock-in effects for change. The model
in the paper focuses on how institutions influence each stakeholder respectively, but institutions also shape CG by structuring
stakeholder interactions, triggering different conflicts, and supporting different types of coalitions among the 3 stakeholders.
The paper illustrates the diversity of such institutionally structured interactions around 3 axes: class conflicts, insider-outsider
conflicts, accountability conflicts. Class conflict: it may arise when the interests of capital and mngmt oppose the interests of
labor, particularly regarding distributional issues (ex. wages). Where capital and mngmt pursue financial interests, such as in
the US, conflict is likely to arise around trade-offs between wages and profits, capital reinvestments and paying out
dividends, or levels of employment and shareholder return. Mngmt may often use employee ownership or contingent pay as
a means to align employee interests with capital and to minimize governance conflicts. Mngmt may also play different roles
in mediating class conflict (ex. the dominance of functional orientations among German managers helps balance financial and
strategic interests, US managers are mostly aligned with shareholders' financial interests because of the prevalence of
external careers and contingent pay incentives). Insider-outsider conflict: it may arise when the interests of labor and mngmt
(insiders) oppose the interests of capital (outsiders). Insiders may favor internal diversification ("empire building"), block
efforts at restructuring, or erect takeover defenses to reduce the threat of external takeovers. Insiders' interests conflict with
minority shareholders' interests in greater liquidity and financial returns, as well as the interests of certain employees (ex.
mobile professionals and noncore employees). The introduction of more autonomous independent directors over the last
few decades has helped insiders to further align mngmt with outside interests and to favor more severe methods of
corporate reorganization. Accountability conflicts: they concern the common interests of capital and labor vis-a-vis mngmt.
Shareholders and employees may form coalitions to remove poorly performing managers or to demand higher corporate
transparency. In Germany, strong labor participation in the supervisory board complements committed blockholders in
actively monitoring mngmt. But where the interests of capital and labor diverge too sharply, such coalitions may break down
and give mngmt increasing autonomy to pursue its own agenda, and thereby damage accountability. The model explains the
differences in CG practices across national boundaries and why certain practices are more used in some countries. For ex, in
the US dispersion of ownership is exceptionally high because financial systems in the US developed differently from other
countries, particularly following the "regulatory divide" of the 1930s. The gap between financial systems was magnified by
the postwar development of welfare states, where the US pension regime favored market liquidity. Finally, intercorporate
networks restricted strategic interfirm cooperation in the context of US antitrust law, thereby encouraging large-scale merger
waves that further diluted ownership. In contrast, in Germany or Italy, concentrated ownership was sustained because of a
combination of factors: property rights favoring blockholders, the availability of bank-based finance, and the dense
cooperative networks preventing rapid dilution through mergers. Institutional change tends to occur slow, rather than as a
big bang. Where international pressures may lead to similar changes in one institutional domain, these effects may be
mediated by the wider configuration of national institutions. This explains why internationalization has not led to quick
convergence on national CG models. The result is often a hybridization of CG models, where practices developed in one
national setting are transferred to another, and they undergo adaptation through their recombination with other governance
practices. Today, Germany and Japan are attempting to introduce "shareholder value" mngmt style to their past institutions
of strong labor participation. This hybridization highlights a growing heterogeneity of organizational practices within national
boundaries (the range of internal variation among firms is growing).