Company Law - The politics of Corporate Convergence

INTRODUCTION

Corporate ownership and governance differ among the world's advanced economies. Some countries' corporations are diffusely owned with managers firmly in control, other countries' corporations have concentrated ownership, and in still others, labor strongly influences the firm. During the past half-century since World War II, economies, business practices, and living standards have converged in Western Europe, the United States, and Japan. Their corporate ownership structures differ, and different degrees of ownership concentration and labor influence persist because there are significant sources of path dependence in a country's patterns of corporate ownership structure. A country's pattern of ownership structures at any point in time depends partly on the patterns it had earlier.

In the following chapter I will be dealing with the various theories of corporate convergence. The chapter includes the various theories which state the reasons for the convergence of corporate systems- the convergence in the legal rules and other norms.

In the 3^rd chapter I will be discussing the various political forces leading to formation of converged legal rules. The political forces consists of the entrepreneurs, investors, controlling shareholders etc. there are reasons which dilute the incentive of these groups to emerge as political forces to impose efficient legal rules.

The 4^th chapter is about the normative concepts of convergence. There are certain rules which are beyond the written laws in a system; these rules are established as norms by the society with practice and experience. Although there are various forces driving to the establishment of these norms. The various forces are inter-jurisdictional competition, the concept of social responsibility, cross border contracts etc.

But still traces of persistence of inherent characters could be found in the individual systems. The 5^th chapter of the project deals with the same. The primary reason for the same is path dependence. There are certain characters in a system which is there because of its origin and history. These make it difficult for the system to change totally to the converged system.

THEORIES OF CORPORATE CONVERGENCE

There are many factors which have brought in the phenomenon of corporate convergence around the globe. Analyses by different groups have suggested different theories of the development of this phenomenon.

FUNCTIONALIST’S THEORY- “Existence of a set of single most efficient system.”

This is tilted towards the principles of corporate mechanisms. The motive of every corporate system is to minimize the cost of production and to maximize the profit. Thus there exists a common goal for every corporate system. The functionalists believe that there must be a single method or mechanism to achieve this common goal. Every system tends to move towards this system which supports the achievement of their goal the best.

The basis of this belief is that there are certain optimal rules to achieve the purpose of the corporate law. On this view, once one stipulates to certain basic features of capitalist social organization, i.e. private property, dispersed wealth for investment, such a system can be easily identified which is a single set of most desirable rules. There are certain measures which have been adopted by different systems for the sole purpose of increasing the profit.

APPLICATION-

These measures have worked for different systems. E.g. there have been substantial similarities in corporate performance by various measures like Executive Turnover and Acquisition Rates.

Executive turnover-

Studies have shown that corporate governance forces and firm performance affect top executive turnover in Finnish listed companies. I document an increase in CEO, top management, and board turnover in response to poor stock price performance and operating income losses. The sensitivity of the relation between stock price performance and CEO turnover is significantly higher in firms with a two-tier board structure (when the CEO is not the Chairman), but significantly lower when the CEO or a board member is the controlling shareholder. These results suggest that both the ownership structure and the board design have implications for the disciplining of managers. And thus the executive turnover is getting to be a common phenomenon for every system.[1]

Moreover, international evidence shows that the level of institutional investors’ equity holding is increasing rapidly. An increasing level of institutional investors’ accumulated ownership, tends to protect managers from corporate control transactions. And it has been found that institutional investors are more likely to replace a poor performing CEO.[2]

Takeover Regulation-

The recent scholarship on corporate governance, cutting across law, finance, government and economics, converging into one dominant model within a competitive global capital market suggests a convergence in this competition toward the dispersed ownership model with its reliance on strong securities markets, extensive disclosure and the use of the market for corporate control to discipline management. There is a role of takeover regulation in a dispersed ownership system, a reach designed to broad enough to encompass the American and Australian legal systems as well as the United Kingdom. Takeover regulation necessarily weaves two relationships - first, the interaction the bidder company and the shareholders of the target and second, a separate but necessarily overlapping relationship between the shareholders of the target and their own management. Poison pills, for example, impact both relationships - they prevent a bidder from coercing target shareholders at the same time that they empower managers to prefer their view of the corporation over that of the shareholders. The American system, illustrated by Delaware's law, relies on courts and judicial enforcement of fiduciary duty to decide when managers have overstepped their bounds in imposing defensive tactics. Other dispersed ownership jurisdictions rely on self-regulatory organizations or governmental bodies to limit director defensive tactics in a way that necessarily empowers collective shareholder action.[3]

The recent reforms of takeover regulation in Europe are leading to a harmonization of the national legislations. A process of convergence towards the Anglo-(American) corporate governance system has been started. Regarding the consequences of the reforms for ownership and control it can be found that, while in some countries the adoption of a unified takeover code may result in dispersed ownership, in others it may further consolidate the block holder-based system.[4]

Consultancy Firms for ‘Perfect System’-

Various consultancy firms have come up in order to converge the system towards this perfect system with maximum efficiency. “We have entered a world of converging economies, business practices and perspectives as well as vast social transformation," says founder and CEO Michael Hauben. "In this new world, the firm focuses on a brand's relevance and its value through the process of corporate convergence as the keys to optimized market value."

These trends led Hauben to realize a new business landscape -- which he coined the "Converged Economy" -- and the need for a new business solution to address it. Hence, he created Brand Convergence and a new professional services category to address the fundamentals of this new economy: "converged business solutions."

The company focuses on a brand's relevance and its value through the process of corporate convergence to build sustainable and highly valued enterprises. The mantra of its company is "one vision, one solution, one brand."[5]

OECD Guidelines for Good Governance-

The OECD produces internationally agreed instruments, decisions and recommendations to promote rules of the game in areas where multilateral agreement is necessary for individual countries to make progress in a globalised economy. Sharing the benefits of growth is also crucial as shown in activities such as emerging economies, sustainable development, territorial economy and aid.

Drawback of the Functionalist Theory-

It can still be argued that there is single most efficient system among multiple possibilities observed. Despite similarities in performance measures, there may be hidden costs to some types of systems; or it may be that some systems have functioned well because they faced unique or transient economic environments. Small investors are unlikely to play an important role in most developing and transition countries. External investors may still be crucial but they are more likely to come in as strategic investors or creditors. There should be a broader paradigm including other stakeholders and mechanisms of governance in order to better understand the problems facing these countries and generate policy implications that compensate for the weakness of the capital markets.[6]

Any international guideline must recognize the international differences in governance systems. Generalization are often more harmful than helpful. Ownership and control structures differ tremendously and so the basic mechanism for correcting governance failures and the role of different governance institutions. General principles do exist, however and should be articulated. In particular when they are unlikely to be so.

ALTERNATIVE APPROACH- EMPHASIZING GLOBALIZATION-

The future convergence of corporate systems, despite pat diversity, would be projected on the basis of the gradual convergence of the economic and social circumstances of the advanced industrial economies, either trough parallel national developments or through the opening up of new global markets. In particular, “globalization” apparently changes the economic environment- by increasing the size of markets and corresponding the efficient scale of production, by creating a common global capital market which subjects national investment opportunities to similar standards- in a way that seems to put pressure for convergence on the different corporate governance systems.

Having adopted the common rules provides a familiar legal environment to wary foreign investors, certifies the reliability and seriousness of the nation’s attempt to attract foreign investment, and reduces the transaction costs of structuring deals by permitting use of a formulaic set of transactional templates.

The advanced economies should by now display similar patterns of corporate structure. Companies in these countries face similar governance problems. All large-scale firms share some key common functions: Capital must be gathered, management must be selected and disciplined, and information must be transmitted to core decision makers. Organizational imperatives could demand organizational similarities. And other powerful forces, it might be argued, drive countries and firms to adopt the most efficient corporate rules and structures. Not to do so in our competitive global village runs the risk that firms and the economy will fall behind. A firm that did not adopt the best structure would be hurt either in its profits and value or in its ability to raise new capital. Countries that fail to adopt efficient rules would inflict costs on their corporations, which would then be worth less and would then be less able to raise capital; as a result, firms, factories, and businesses might suffer, or they might migrate away from the country.[7]

Drawback-

Competition between securities regulators simply cannot exist in anything like the pure form posited by the debaters. Finally, my analysis is relevant to the debate over the extent of likely convergence in national corporate governance systems. The institutions that support securities markets coevolve and reinforce each other. Weakness in one can sometimes be offset by strength in another. Formal legal rules are only part of a large web of market-supporting institutions. This suggests that convergence will sometimes be functional (different countries use different institutions to accomplish similar tasks) rather than formal (different countries adopt similar rules).[8]

NORMATIVE CONCEPTION- COLLECTIVE ACTION AND PUBLIC LAW-

There is reason to be skeptical about any short –run tendency towards convergence in the direction of a single set of effective legal rules. The basis of the argument is the “public good” aspect of corporate rules. To account for convergence, one requires a political theory of the formulation and effect of corporate rules; conversely obstacles to convergence that arise from the fact that corporate law rules are the products of collective action.

In the normative conception, rules of corporate design are modified to serve political goals that supplement, without displacing or conflicting with, the goal of reducing capital costs. Promoting a cooperative style of labor relations, and facilitating nation economic coordination are two goals that apparently loom large in most industrial countries. The political forces, as a positive matter, will hinder convergence. The political forces represent not only the actors in the corporate field but also those who are indirectly affected by corporate action.

                                                SUPPLEMENTING

POLITICAL GOALS                                             GOAL OF REDUCING COSTS

                                            

                                            

                                               CONVERGENCE

                     (towards a common corporate system in all political system)

The politics of any country has to look upon the welfare and benefit of everybody affected by the socio legal system of the nation like the entrepreneurs, managers, financiers, and capital suppliers. Accordingly the corporate rules of every system are framed and rate of convergence is determined. The consideration of motivation of people other than profit makers and actors in the corporate field become as barrier to convergence in the legal system.

Interest Groups As Political Forces for Corporate Lawmaking

The most efficient system, as contemplated by the Functionalist group must have the capability to survive in a particular social and legal system. The emergence of the common best system in a country depends upon the political and capital structure prevailing there. But the corporate rules primarily affect the private profit making business of the entrepreneurs or firm founders.

If inefficient rules are adopted by the legal system the cost of the suboptimal choices are internalized by the entrepreneurs and these costs are ultimately imposed on the investors getting in to contractual relations with them. They in turn demand compensation for any extra cost suffered by them due to inefficiency of terms of contract due to suboptimal capital structure. Thus the ultimate sufferers in most of the cases are the entrepreneurs.

LEGAL  RULES GOVERNING FIRM - INVESTOR  RELATIONSHIP-

If the law is liberal-

When the legal system gives them enough space and freedom the parties to contract, i.e. the firm founders and the investors, choose the most cost efficient terms to contract and opt out the inefficient ones.

If the law purports to be mandatory-  

The parties tend to make implicit agreements favoring their capital goals. They tend to mould the laws towards the capital structure most suitable to capital raising and profit making.

Thus, whatever the system is like, the actors in the capital market tend to move towards the single most efficient system.

ACTORS AFFECTING LEGISLATIVE PROCESS-

The corporate rules ultimately affects the corporate actors, they are the ones who suffer the cost due inefficiency of the system. Thus they have an incentive in reform of the laws to support a proficient system. The group of actors consisting of entrepreneurs and financiers can emerge as political force influencing the law making process towards more efficient rules.

Globalization gives an incentive to foreign investors to impose efficient rules. The motivation towards international market compatibility exists because of foreign investors coming in the ambit of political forces. These foreign investors may have additional clout because of their enormous wealth and alliance with foreign sovereigns as in the paradigm of World Bank.

Socially Desirable Incentives-

The body making rules has the responsibility of a greater ambit of people than that of the corporate actors. The activity of a company also affects people outside the field of investors and firm founders. Thus, in turn, the law dealing with corporate action will have an effect on the people of society and apparently they are larger in number than the corporate actors. Thus the lawmaking process should be in consideration of social incentives also.

Corporate Social Responsibility (CSR) is the alignment of business operations with social values. It takes into account the interests of stakeholders in the company's business policies and actions. CSR focuses on the social, environmental, and financial success of a company - the so-called triple bottom line - with the aim to achieve social development while achieving business success. CSR is the point of convergence of various initiatives aimed at ensuring socio-economic development of the community which would be livelihood oriented as a whole in a credible & sustainable manner.[9] 

 Now, since the society in every system is different from each other, the lawmaking process is affected and convergence may not be possible with countries with dissimilar social system.

JURISDICTIONAL COMPETITION-

This is prevalent mostly in self governing local or federal governments where the state and the bodies are in jurisdictional competition with each other. The illustrations can be discussed as herein under.

Competition within Morocco to Improve Business Environment-

An inter-jurisdictional competition is currently underway in Morocco between self-selecting local-government municipalities to improve their business environment. A series of gaming mechanisms are used to elicit the required valuations of payoffs to municipalities as well as disutility of tasks electors must carry out. The competition is explicitly designed to stimulate collective action, attenuate elector opportunism, and forge an alignment of incentives among private sector, civil society, and government actors to reduce red tape and improve governance. The mechanism increases the effectiveness of donor assistance by avoiding adverse selection in that only localities that are serious about reform will be willing to bear the costs of participation. Moreover, the competition leads localities to create a consensus among diverse groups to rise above petty interests and engage in real reform to the benefit of all parties. Finally, donor funds are leveraged since a limited amount of rewards stimulates a large number of reforms.[10]

Trust Fund Trends in the States of US-

Since 1986, a third of the states of United Sates have abolished the Rule Against Perpetuities to open a loophole in the federal estate tax. Since 1997, a handful of states have validated self-settled asset protection trusts, which purport to allow the settler to shield assets from creditors. Based on reports to federal banking authorities, we find that through 2003 a state's abolition of the Rule increased its reported trust assets by $6 billion (a 20% increase on average) and increased its average trust account size by $200,000. By contrast, the examination of self-settled asset protection trusts yields indeterminate results. It has been found that roughly $100 billion in trust funds have moved to take advantage of the abolition of the Rule. Interestingly, states that levied an income tax on trust funds attracted from out of state experienced no increase in trust business after abolishing the Rule. This finding has relevance for the study of jurisdictional competition, because it implies that abolishing the Rule does not directly increase a state's tax revenue. Yet the jurisdictional competition for trust funds is patently real and profound.[11]

Convergence- as in European Union-

Under fiscal federalism the list of legitimate central government functions lengthens as a minimal federation like the EU successfully brings about economic integration by opening national borders to free movement. As member state economies become less heterogeneous and economic interconnections between them increase in number and depth, member state economic policies, particularly taxing and spending policies, cause more fiscal externalities. Fiscal federalism theory also describes allocative inefficiencies in competitive tax systems, particularly with respect to corporate income and commodity taxes, and highlights negative distributional consequences of tax competition. Coordinative initiatives directed to the elimination of resulting inefficiencies in resource allocations therefore hold a legitimate place on the EU's integration agenda. The strength of both subsidiarity's decentralization presumption and of any rebuttal case depends on political risks and economic factors specific to the situation. In the tax coordination case addressed, the risks turn out to be low, permitting the presumption to be rebutted by a strong theoretical case articulated on a spotty empirical record.[12]

PROBLEMS-

·         Social Responsibility-Entrepreneurs and controlling shareholders or investors interests may conflict with social interests. What may to be an optimal system in the view of corporate actors may not be socially optimal.  So the profit of private bodies has to be accepted only if it is in harmonization with social welfare. the entrepreneurs and controlling shareholders may prefer rules about capital structure different from those that would be socially optimal.

The recent issue on control transactions and optimal structure demonstrate that even the design of the firm’s capital structure entrepreneurs may profit by departing from social optimum. A suboptimal capital structure may enable the founder and controlling shareholder to extract greater surplus when he sells control.[13] 

Stem Cell Research-

The private sector which has the most to gain from the stem cell technology must demonstrate leadership in corporate social responsibility and develop volunteer guidelines to see that the benefits of stem cell research is harnessed in an ethically appropriate and socially responsible manner.[14]

 In India as in the rest of the world there is a growing realisation that capital markets and corporations are, after all, created by society and must therefore serve it, not merely profit from it. And those consumers and citizens’ campaigns can make all the difference.[15]

·         Conflicts in the Interests of Groups Creating Political Forces-

Entrepreneurs no longer have incentives to push for the optimal set of legal rules in legislative for a. they would prefer rules that would permit them to extract the maximum gain for themselves.

Even the shareholders interests need not be optimal in the larger extent. They would intend to maximize the premium upon sale of control. Small elite of controlling shareholders will have little reason to develop an extensive system of disclosure, to encourage changes of control through hostile takeovers, or give outside shareholders the power vigorously to enforce the duties of managers to maximize share value.

·         Escape From an Inefficient System to Global Market –

Internationalization of capital markets discourages the firms to impose an efficient system. Firms who wish to escape the inefficiency of local rules may be able to do so by going onto global markets.  By doing this they will let the sovereign regulating the global market to regulate them with their efficient rules.

 However, there are apparent restrictions to this escape; the firm cannot avoid the mandatory local rules. Overcoming these barriers require change in local rules. But still the extant managers, who benefit from the current, inefficient rules, have no reason to change the local rules to permit potential competitors to take advantage of the more efficient rules in other markets or jurisdictions.

·         The Corporate Actors are Diluted Effect of the Inefficient Rules-

The existence of inefficient rules reduces the competitiveness of the economy as well as of the manager’s firm. But still the effect on the managers and investors is little. They bear only a small share of losses incurred due to this loss in competitiveness. In such inefficient system the firm has scope to expropriate gains which the others can not. Thus the firms on the basis of their confidence can foresee them leading in the existing scenario.

NORMATIVE CONVERGENCE

The discussion in the preceding chapter is based on the view that the corporate convergence results from the convergence of corporate legal rules. But it is apparent that in every society there are certain norms which go beyond the legal and codified rules. There are certain norms which evolve in the society with time and out of experience. Such norms are generally progressive in nature because they are accepted, either out of experience or are adopted from some other system. Thus they always tend to converge towards the most efficient system, escaping the inefficiencies in the legal system, if any. At times even the laws play an important role in creating supporting these norms e.g. the laws may enforce the implicit norms when relied upon in the face of mistake or due to informational lag.

Normative Convergence in the Presence of Differences in Legal System-

Convergence in the corporate system may occur inspite of the fact that there exist great differences in the legal corporate rules. The establishment of legal rules may lag behind the norms because of the delay in the procedure of sanctioning.

Lag theory- there are two ways in which laws are established: one is when the law leads the society i.e. the legal system mandates something to be followed by the society; second is when the society leads the law, i.e. the society adapts certain practice which is later on sanctioned by the law. The latter one is called as the lag theory.

So norms may lead to legal rules as per the lag theory. But even in the absence of the laws, they have a driving force towards the efficient system.

Efficiency by Co-operation-

As we dealt in the previous chapter that in case of inefficient leg l rules the investors and the firm founder can make out ways to maximize their profit. We also discussed how the operating shareholders maximize their gains in the prevailing legal rules. Thus it can be derived that if all the actors work in co-ordination, they can succeed in extracting the maximum out of the business. a co-ordination between the various factors strike the perfect balance of the most efficient system. The contextual specification will often reveal social norms and sanctioning systems that temper the inefficiencies of the ownership structures that appear inefficient when considered abstractly.

An apparently inefficient ownership structure may achieve a net efficiency gain.

Parent-Subsidiary Relation in Germany-

In the German system legal rules revising the Konzean doctrines, i.e. rules governing the relations of affiliated companies, permitted the emergence of the new form of the management holding company, under which a strategic planning parent used partial share-owning ties as the form basis for co-ordination of production among the numerous subsidiaries. Now this legal rule has been adopted to establish a complimentary norm which has prevented the parent company from being opportunistic. Workers at the subsidiary companies possess crucial information about production processes and market demand needed for co-ordination of activities with other subsidiary firms, and for strategic planning by the parent. In these circumstances the parent company is always in a pressure of retaliation by the subsidiary stakeholders by information-withholding, in case of any opportunistic behavior.[16]

PROBLEMS-

·         Lack of Enforceability-The influence of norms raises public choice problems. Norms display the basic problems of collective action. The groups of people ruled by the norms have the choice to divert from the same. If any particular actor intends to garner all the advantages by breaking the norms, there is no authority to stop him.

·         Availability of The means to Convergence of Norms- as in convergence of legal rules, the norms should also be easily adaptable by every society. The means for convergence of norms should be present e.g. the co-operative inter-firm structures that constrain controlling shareholder abuse in German management holding companies depends upon the technical sophistication of German workers. Thus for any other society to adopt this mechanism, it must be installed with an efficient education system producing techno-savvy workers.

·         The Inherent Characters the Systems- Since, these norms are formed due to social forces there are certain inherent characters prevailing in every society which may hinder the adoption of the common norms. Every society has different needs and traits because of its basic structure. Thus, it is very difficult to converge the systems of all the society only on the basis of norms established by the society, without any legal backing.

·         Requirement of A Supportive Legal System- no norm shall go in contravention of the legal rules of a system. The laws can be molded to form certain normative practices in a society. The norms can also be used to supplement the legal rules to create the most efficient system, but nothing in a society should go against the legal system. Thus the prerequisite to the phenomenon is the existence of a supportive or non-prohibitive legal system.

PERSISTENCE AND PATH DEPENDANCE

There are significant sources of path dependence in a country's patterns of corporate ownership structure. Because of this path dependence, a country's pattern of ownership structures at any point in time depends partly on the patterns it had earlier. Consequently, when countries had different ownership structures at earlier points in time-because of their different circumstances at the time, or even because of historical accidents-these differences might persist at later points in time even if their economies have otherwise become quite similar.

SOURCES OF PATH DIFFERENCE-

One source of path dependence, which we label structure, driven path dependence concerns the direct effect of initial ownership structures on subsequent ownership structures. The corporate structures that an economy has at a given point in time are influenced by the corporate structures it had earlier. Another source of path dependence, which we label rule, driven path dependence arises from the effect that initial ownership structures have on subsequent structures through their effect on the legal rules governing corporations. By corporate rules, we mean all the legal rules that govern the relationship between the corporation and its investors, stakeholders, and managers and the relationships among these players including not only corporate law as conventionally defined but also securities law and the relevant parts of the law governing insolvency, labor relations, and financial institutions. Corporate rules themselves are path dependent.

Choices of ownership structure might differ in two economies that now have identical corporate rules but started with different ownership structures. There two reasons why prior ownership structures in an economy might affect subsequent structures one grounded in efficiency and the other in rent-seeking. First, the efficient ownership structure for a company is often path dependent. Due to sunk adaptive costs, network externalities, complementarities, and multiple optima, the relative efficiency of alternative ownership structures depends partly on the structures with which the company and/or other companies in its environment started.[17]

Second, existing corporate structures might well have persistence power due to internal rent-seeking, even if they cease to be efficient. Those parties who participate in corporate control under an existing structure might have the incentive and power to impede changes that would reduce their private benefits of control even if the change would be efficient. For example, a controlling shareholder might elect not to move her firm to a diffused ownership structure because the move would reduce the controller's private benefits of control. Similarly, the managers of a company with diffused ownership, seeking to maintain their independence, might elect to prevent their firm from moving to a concentrated ownership structure even if the move would be efficient overall. And in nations in which labor unions play a role in corporate control, union leaders might seek to maintain structures that give them such power. As long as those who can block structural transformation do not bear the full costs of persistence, or do not capture the full benefits of an efficient move, inefficient structures that are already in place might persist. To be sure, all potentially efficient changes would take place in a purely Coasian world. However, the transactions feasible in our imperfectly Coasian world often would not prevent the persistence of some inefficient structures that are already in place.

A country's legal rules at any point in time might be heavily influenced by the ownership patterns that the country had earlier.  Two reasons for the path dependence of rules can be identified, one grounded in efficiency and the other in interest group politics. First, even assuming that legal rules are chosen solely for efficiency reasons, the initial ownership patterns influence the relative efficiency of alternative corporate rules; the set of rules that would be efficient might depend on the country's existing pattern of corporate structures and institutions.

Second, rule-driven path dependence might arise from interest group politics. A country's initial pattern of corporate structures influences the power that various interest groups have in the process producing corporate rules. If the initial pattern provides one group of players with relatively more wealth and power, this group would have a better chance to have corporate rules that it favors down the road. Positional advantages inside firms will be translated into positional advantages in a country's politics. And this effect on corporate rules will reinforce the initial patterns of ownership structure. For example, once a country has rules that favor professional managers and protect diffused ownership structures, these managers will have more political power and this power will in turn increase the likelihood that the country would continue to have such rules. Similarly, once a country has legal rules that enhance the private benefits to controlling shareholders and thus encourage the presence of such controllers, the controllers' political power will also increase the likelihood that the country would continue to have such rules.

Structure Driven Path Difference-

To be sure, to the extent that a country has a suboptimal legal system due to interest group politics, this suboptimality might give incentives to those who set up companies to opt out of the country's legal system through appropriate charter provisions or foreign incorporation or foreign listing. In a Coasian world, such mechanisms could lead to all companies being governed by the same efficient arrangements. However, in an imperfectly Coasian world, these mechanisms are imperfect and cannot be expected to rigorously produce such a convergence.[18]

Corporate structures and corporate rules can be both path dependent and efficient at the same time because the identity of the efficient corporate structure or corporate rule might depend on a country's original ownership patterns. Second, although another part of the analysis does concern the possibility that inefficient corporate structures or rules might arise, the focus of this part of the analysis is not on the possibility of inefficiency but on the role played by path dependence. Someone might accept that interest group politics can produce inefficient corporate rules but still expect roughly the same type of inefficient rules. For this reason, we should focus not on the possibility that inefficient rules might arise but rather on showing why they would be likely to arise in different ways and to a different extent in different countries, depending on the countries' initial conditions. For example, in the analysis of interest group politics, it is important to explain why the inefficient legal rules resulting from interest group politics might vary among countries due to the initial patterns of corporate ownership structures.

Path dependence focuses on reasons why countries that are otherwise similar in all other aspects of their economy might still differ in their corporate structures. However, the advanced economies might differ in some relevant aspects. Differences in the nature of firms and markets, and in opinions, culture, ideology, and political orientation, might have all impeded, and might well continue to impede, convergence of corporate structures.

Path dependence, then, can play an important role in the development of corporate ownership and governance structures around the world. The sources of path dependence can explain why (despite the powerful forces pressing toward convergence in an increasingly competitive and global marketplace) the advanced economies still differ in important ways in their patterns of corporate ownership and governance. The identified path dependence also indicates that some important differences might persist.

CONCLUSION

In this project, I have surveyed the various political factors leading to convergence of corporate governance of different systems. The analysis gives an idea that although there are other theories of convergence, the functionalist theory, emphasizing the movement towards most efficient corporate system stands most relevant to most of the practical cases. This can be reasoned by the motive of maximum profit as being the most fundamental of principles in the corporate world.

Since the corporate system is more to do with the private matters of the transactions between individual bodies, these individuals have an incentive to impose the most efficient legal rules leading to the formation of the most efficient corporate system. Thus convergence is reached due to influence of political forces.

There are rules other than laws determining the corporate actions. These are the norms established by the society and it actors. These norms are always established for the convenience and profit of the actors and thus focus towards the most efficient system.

In both the factors leading to convergence, there are certain problems which arte specific to their respective nature. But there is a common hindrance which makes it difficult for the systems to converge. The theory of path difference is the most prominent one. Every system has a character specific to its existence. The renunciation of these characteristics is difficult. Therefore the structure and origin of the systems might make convergence a remote phenomenon.

---

[1]Benjamin Maury, Corporate Performance, Corporate Governance, and Top Executive Turnover, www.ssrn.com/articles, visited on September 11, 2005

[2] Robert Nerumann & Torben Voetmann, CEO turnovers and Corporate Governance: Evidence from the Cpenhagen Stock Exchange  cited from Madhavi Garikaparthi, Research Summary, Vol. II No. 2 The ICFAI Journal of Corporate Governance, 100 (April 2003)

[3]Robert B. Thompson,  Takeover Regulation After the 'Convergence' of Corporate Law, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=362880,  visited on   September 20, 2005

[4]Marc Goergen, Marina Martynova &  Luc Renneboog,  Corporate Governance Convergence: Evidence from Takeover Regulation Reforms, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=709023, visited on    September 20, 2005

[5] <http://www.findarticles.com/p/articles/mi_m0EIN/is_2001_Nov_1/ai_79613766> visited on September 11, 2005

[6]  Erik Berglof& Ernst-Ludwif von Thodden, The Changing Corporate Governance Paradigm Implication for Transition & Developing Countries,  Vol. II. No. 3. ,The ICFAI journal of Corporate Governance,  7 (July 2003)

[7] Lucian Arye Bebchuk & Mark J. Roe, A Theory of Path Dependence in Corporate Ownership and Governance 52 Stan. L. Rev. 127

[8] Bernard S. Black, The Legal and Institutional  Preconditions For Strong Securities Markets 48 UCLA L. Rev. 781

[9] http://timesfoundation.indiatimes.com/articleshow/523782.cms visited on  September 20, 2005

[10] Clifford Zinnes & Patrick Meagher, Premeditated Inter-Jurisdictional Competition in Morocco to Strengthen Local Governance Increase Donor Effectiveness, http://www.isnie.org/ISNIE04/Papers/Zinnes%20and%20Meagher.pdf visited on September 15, 2005

[11] Robert H. Sitkoff,  Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, http://cua.mit.edu/ketterle_group/Research_topics, visited on September 15, 2005

[12]William W. Bratton,  Fiscal Federalism, Jurisdictional Competition and Tax Coordination: Translating Theory to Policy in the European Union,  http://papers.ssrn.com/sol3/papers.cfm?, visited on September 15, 2005

[13] Lucian A. Bebchuk, Efficient and Inefficient Sales of Corporate Control, 109 Q. J. Econ. 957 (1994)

[14] <http://www.fbae.org/Channels/Views/Scientific_Community_Must_be_More_Assertive.htm> visited on 20th September, 2005

[15] <http://infochangeindia.org/fetaures1DS.jsp> visited on 20th September, 2005

[16] Jeffrey. N. Gordon & Mark. J. Roe, Convergence and Persistence in Corporate Governance (Cambridge University Press, Cambridge, 2004), 305

[17]William A. Klein, Connected Contracts, 47 UCLA L. Rev. 887

[18] Supra note 7