The Rise of Shareholder-Orientated Corporate Governance in Europe: Longitudinal Firm-Level Evidence

Much debate has taken place about the ‘convergence’ of national corporate governance systems on a more shareholder-orientated system. Many empirical studies addressing this question have focused on changes in legal rules and much effort went into measuring the level of legal minority shareholder protection around the world (La Porta et al. 1997; Pagano & Volpin 2005, Armour et al. 2009). Comparatively few studies measure changes in firm-level corporate governance practices. One reason for the neglect is a strong assumption of legal determinism that prevails in the literature. Consequently, legal rules are taken to proxy for a national corporate governance system as a whole. However, this assumption is increasingly challenged by actor-centred institutionalism in political science (Streeck & Thelen 2005) and by comparative legal scholarship (Milhaupt & Pistor 2008, Berkowitz & Pistor 2003). Indeed, there may be ‘gaps’ between the ‘laws on the books’ and the actual practices that firms follow. This implies that processes of corporate governance change may not be law-driven processes, at least not in all cases. It might be that corporate practices evolve quite independently of legal rules. This paper attempts to empirically investigate the relationship between legal rules and corporate practices and thus test the Law and Finance school’s ‘law matters thesis’ based on a new unique longitudinal dataset. The dataset is based on a repeated cross-section of the 100 largest firms in four European countries between 1990 and 2010 and contains information for a series of corporate governance items covering ownership structure, capital structure, and board composition. The four countries represent the legal families identified in the Law and Finance literature: The Netherlands (French civil law), Switzerland (German civil law), Sweden (Nordic civil law), and the UK (common law). I find strong evidence for converging trends, both in processual terms (similar trends) and absolute terms (more similarity across countries). Not all of these changes seem to be driven by legal change, because change in the measure of legal shareholder protection does not precede corporate change in all cases. Nevertheless, the convergence is not complete (differences persist) and I also find that the trends are sufficiently divers in each country to suggest that contextual factors are important to understand the relationship between law and practice.