Policymakers can choose from two competing models of corporate governance. The first is a market-oriented model that relies on relatively little mandatory law to protect shareholders. Instead, it depends on a host of other formal and informal mechanisms, such as incentive-based compensation and hostile takeovers, to hold managers and directors accountable. The United States (or, more correctly, Delaware) embodies this approach, with its so-called “enabling” corporate law that parties can opt out of in crafting their governance structures. The second approach depends on a mandatory model of corporate law in which the state, as opposed to the marketplace, plays a central role in shoring up shareholder protections by fashioning mandatory rules that define shareholder property rights.
Which corporate governance model should developing countries follow? The stakes are high in answering this question correctly, as studies show a link between strong protections that shield shareholders from exploitation at the hands of insiders and the promotion of equity markets and economic growth.
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