How Effective are Capital Markets in Exerting Governance on Corporations? Lessons of Recent Experience with Private and Public Legal Rules in Emerging Markets

It has become a truism that the pressures of the capital markets will improve the governance of corporations; equally, that improvements in corporate governance will promote development of the capital markets. However, the relationship of the capital markets to the governance of corporations is neither simple nor linear; rather, it is a dynamic process responsive to many factors. The complexity is, in part, a function of the complexity of legal change for which a simple convergence story does not do justice (Pistor). The promotion of international standards of corporate governance has resulted in the proliferation of transplanted legal concepts. Rather like rabbits in Australia, these concepts may behave a little differently than expected, the resulting conundrum being high level standards with low levels of effectiveness. At worst, there may be seemingly perverse situations, where an internationally recognized, but domestically ineffective, rule is introduced into a system.Although it may be too early to pronounce on the relative effectiveness of various capital market driven governance initiatives, recent experiences in emerging markets and transition economies, especially Latin America, point to certain predictors of effectiveness, including the form a rule takes (contract based private rule, statutory public rule, or intermediate form such as contractually based listing rules with statutory backing) and the legal tradition in which the rule operates. Voluntary codes and procedural remedies drawn from Anglo-American law, for example, may not be the most effective means of channeling market forces to the improvement of the governance of corporations in continental European-style legal systems. The Latin American cases are instructive in this regard as governance mechanisms are being introduced in multiple guises along a continuum of private and public rules, amplifying the prospects of effectiveness