A Systems Approach to Corporate Governance Reform: Why Importing U.S. Corporate Law Isn't the Answer

Promoting economic growth in developing countries is a daunting task. To be sure, economic prosperity depends on a host of economic, political, social, geographic, historical, and cultural factors. In recent years, a rich literature has developed focusing on one important factor - capital markets. A link has been shown between capital markets and economic growth, as one might suspect. The question, then, is what accounts for the development of capital markets, including thick equity markets in which ownership and control separate. The "law matters" thesis, spearheaded by the work of La Porta, Lopez-de-Silanes, Shleifer, and Vishny, offers one important explanation - namely, that the law plays a central role in the development of securities markets by protecting shareholders (and creditors) from insider abuses and expropriation, thereby encouraging investment. Assuming that law does matter, the question for developing countries is, "What law?" As is often the case, when considering corporate governance reforms in developing countries, attention shifts to the U.S. The U.S., after all, has the world's thickest securities markets. But is transplanting U.S. corporate law to developing countries likely to promote securities markets and economic growth there? Put differently, to what extent should the government displace private ordering with more substantive regulation of corporate governance in developing countries? In evaluating these questions in this article, I conclude that in most instances, developing countries should adopt a mandatory model of corporate governance, as compared to the enabling market-based approach that the U.S. (i.e., Delaware) has opted for. The article concludes by outlining what such a mandatory regime might look like.