What is a regulation?
According to Morgan and Engwall (1999)
- All formal and informal norms and expectations that social actors generate about how to act in particular contexts.
- The mechanisms which are generated to monitor conformance with expectations…
- … and the rewards and disciplinary system developed to ensure conformity (Morgan and Engwall, 1999)
Why do we need regulations?
- Intervention
- Market failures
- To maintain trust in the market
- Globalization and standardization
Describe five regulation in corporate governance (inspired by Clarke, 2007)
Financial market regulation
* Decrease information asymmetry between investors – insiders
Corporate law
* Defining relationships between constituents
Labour law
* Defining the involvement of workers in decision making
Corporate tax regulation
* Define the division of value added of the company
Bank regulation
* Define the conditions for different types of corporate financing
Describe the market follows the regulation hypothesis (La Porta et al)
Having strong:
* Business Laws
* Accounting Regulations
* Audit Regulations
* Financial Market regulations
* Minority Protection
Leads to:
Diffused Ownership
Creating a need for:
* Effective Capital Markets
LP: Im really unsure if you use the model like this or not
Describe the regulations follow the market hypothesis (Coffee)
Having:
* Industrial Development
* Need for risk capital
* Insufficient supply of credit capital
* Exisitence of risk capitalists
Leads to:
Raise of the stock-market
Creating a need for:
Regulation depending on the historic development of the country (path dependency)
LP: Im really unsure if you use the model like this or not
What are the two legal traditions around the world?
Civil Law
* Roman empire
* Code Law
* French, Germanic, Scandinavian
Common Law
* Brittish empire
* Case Law
* UK
Describe regulative convergence
- Refers to increasing isomorphism in the governance practices of public coprorations from different countries.
- It can be either in form (incresed similarity in legal frameworks and institutions) or in function (different rules and instiutions but they still perform the same function such as ensuring fair disclosure or accountability by managers).
- Two countries can either adopt similar corporate governance laws (having a de jure convergence) or the actual practices converge (having a de facto convergence)
What are the arguments for regular convergence?
The global corporation
* No home country, rational decisions regarding localization
* Influenced by the product markets
The global investor
* ”Home country effect”
What are the argumenst against regulative convergence?
- The legal reason
- The institutional reason
- The political reason
Describe the ideal of self-regulations
Gunningham and Rees (1997)
- Innovations
- Fast
- Flexibility
- User knowledge
- Low cost
- Symbolic rather than practice
- State protection of private interest?
Describe the ideal of Law-regulation
Gunningham and Rees (1997)
- Democratic
- Legitimate
- Formalised
- Dependable
- Predictable
- Ossified
Why should corporation issue a code of conduct? What is the “but”?
- The efficiency rationale: The main function of codes is to compensate for deficiencies in the legal system regarding investor protection, i.e. civil law countries will issue codes. (neo-economic theory)
- The legitimacy rationale: The code legitimate national companies in the global financial market, i.e. countries that wants an active capital market will issue codes. (institutional theory)
- But: depends on the power relations and possibility to extract private benefits… (path dependency theory)
How do you implement a code of conduct in a way that is common for all import of regulation?
- Transplantation of regulation: to completely take over a regulation developed for another context
- Translation of regulation: to take over the idea or the labels of a regulation, but adjust it to the national context.
What is common for most codes of conduct?
- Formally voluntary
- Issued by ”experts”and describing ”best practice”
- Formulated to be flexible used (comply or explain)
- Building on market mechanisms for evaluation and compliance
- Continuously evolving
Using corporate codes as self-regulation, what are the reason and risks?
Reason: “Flexibility”
However, Often initiated of government and almost always part of the listing requirement
Risks:
* Lower the shareholders possibility to make a decision ex ante
* Open up for “capture”
Describe five possible steps in regulatory processes
A scale from Legalislative regulation to Self-regulation
* Law enforcement
* Responsive regulation
* Enforced self-regulation
* Professional/ industrial self-regulation
* Full self-regulation
Describe the regulatory process of law enforcement
- based on parliamnetary decision
- non-voluntary
- enforced through the judicial system
Describe the regulatory process of Responsive Regulation
- considers the material conditions of the company and is developed in cooperation
- ofter law and/ or non-voluntary enforcement mechanisms are depending on the abidance by the law by the corporations
Describe the regulatory process of Enforced self-regulation
- norms and implementation are decided by the professional/ industrial association as standards
- recommendations and codes
- on the assignment of the state, state supervision and enforcement mechanisms
Describe the regulatory process of Professional/ industrial self-regulation
- norms and implementation are decided by professional/ industrial association
- often standards, recomendations or codes enforced by “ethical committees” and threat of exclusion
Describe the regulatory process of Full self-regulation
- norms and implementations are decided by the individual company
- no enforcement mechanisms
Describe the three governmental approaches to regulation
”Simple state”
- rudimentary legal framework, few enforcement mechanism or institutional support (pre-industrial)
Traditional state
* developed commercial laws, centralized processes and support institutions
Regulatory state
* ”governance at distance”, decentralized processes and support institutions.
Describe the regulatory state
- ”governance at distance”, decentralized processes and support institutions.
Rule based
* From capture to captured
* Detailed rules
* Implemented by professions / business organization
* Supervised by governmental agencies
* For example: SOX-act in USA
Principle based
* Development through ”expert” committees
* Principles rather than rules
* Implemented and supervised by profession / business organization
* For example: Combined code in UK
In short, describe the regulatory process
- Occur at industrial/professional level, national level and international level
- Include a number of parties such as the government, expert organizations and corporations which support expert knowledge and interests into the process
- Depend on the approach from the state, the resources invested and the legal traditions
- Consist of norm design of norm, implementation, clarification and enforcement
