Ownership Structure, Legal Protections and Corporate Governance

This paper surveys the issues and devises an analytical framework for policy makers and policy advisors concerned with corporate governance. The framework takes a functional approach, identifying six functions provided by a governance system. The paper highlights the possibilities and limits to governance reform through the adoption of legal protections and the use of ownership structure. I caution against excessive emphasis on legal rules themselves, demonstrating their insufficiency to provide the functions of governance. Instead, I first emphasize the importance of effective legal protections that require complementary governance institutions including political structure, the location of judicial authority, norms, and information/reputation intermediaries. Second, I draw attention to ownership structure, reviewing theoretical and empirical support for the beneficial effect of identity and concentration on the functions of corporate governance in the absence of effective legal protections. A review of the evidence from established and newly privatized firms reinforces these contentions. The paper concludes with four broad agenda items for both reformers and future research. Parts of this paper draw heavily on Dyck (2000), “Privatization and Corporate Governance: Principles, Evidence and Future Challenges.” For helpful discussions, I thank Harry Broadman, David Ellerman, Avner Greif, Roumeen Islam, Carl Kester, Rafael LaPorta, Jay Lorsch, Thomas McCraw, David Moss, John Nellis, Katharina Pistor, Julio Rotemberg, Bruce Scott, Mary Shirley, Joseph Stiglitz, Philip Wellons and seminar participants at the Harvard Business School and the World Bank. All errors that remain are my own. I am grateful to the World Bank and the Division of Research of Harvard Business School for their support.