How Political Institutions Determine Corporate Governance Reforms: The Polity, Law and Corporate Practices in the Case of Switzerland

Abstract

The aim of this article is to contribute to our understanding of the role that political institutions play in the reform processes of national corporate governance regimes. I argue that existing theories are limited in that they conceive of political institutions' impact on corporate governance largely in terms of a deterministic influence on the political coalitions that emerge and on the policy outcomes. Based on the analysis of the paradigmatic case of a consensual democracy – Switzerland – I show that the consensual polity does not directly determine the outcome of a reform process, but rather the direction of causality between legal changes and changes in practices as well as the nature of the changes. Consensual polities require large parliamentary majorities for legal change to happen. Therefore, corporate practices are likely to change before legal rules and less demanding forms of institutional change, such as ‘layering’, are favoured.

Keywords:

• corporate governance change
• preferences
• political system
• Switzerland

Notes

I am grateful to Simon Deakin, Gregory Jackson, André Mach, Mathias Siems and the anonymous reviewers for their helpful comments on earlier versions of this paper. All remaining errors are my own. The research for this article was carried out as part of the ESRC-sponsored project “Law, Finance and Development” (RES-156-25-00) directed by Profs S. Deakin, J. Armour and A. Singh (Universities of Cambridge and Oxford) and of a grant of the Swiss National Science Foundation “Regulations of Swiss Corporate Governance” (grant no. 1214-068112.02/1) directed by Prof. T. David and Dr. A. Mach (University of Lausanne, Switzerland).

A ‘veto point’ is defined as any point in a political system where legislation can be blocked (Gourevitch and Shinn 2005: 71, fn 28)

The fundamental assumption that corporate governance questions are decided by politicians and parties in the electoral arena has recently been convincingly criticised by Culpepper (2010), which argues that corporate governance is mainly a low-salience issue which has little appeal to voters and hence politicians.

The data sets generated by this programme are available at: http://www.cbr.cam.ac.uk/research/programme2/project2-20.htm

Due to the possibility for firms to opt out of this obligation, the variable is coded only 0.5 instead of 1.

This interpretation of the Lex Koller is debated, however, as the Lex Koller does not aim to prohibit foreigners from acquiring real estate in Switzerland with productive goals.

The Federal Government has submitted an abrogation proposal of the Lex Koller to the consultation procedure in 2006. The federal parliament refused, however, in June 2008 to follow the government's proposal for fear of a boom of ‘second homes’ in the Alps (see NZZ Online, 11 June 2008). It is also interesting to note that in spring 2007 Implenia – a Swiss construction company – has explicitly referred to the Lex Koller in order to refuse to register a part of a stake which had been acquired by the British hedge fund Laxey Partners in an attempt to take control of Implenia. The existence of art. 4 of the transitory provisions has hence still a certain practical relevance today.

The sample includes the 10 smallest listed Swiss companies with a market capitalisation above $500 m as of the end of 1995 (La Porta, Lopez-de-Silanes and Shleifer 1998: 6–7).

The sample is constituted of the 40 largest Swiss companies in 1990 based on both turnover and market capitalisation. There is a large overlap between the two and the final sample contains 53 companies. Of these 53, for 3 no data on capital structures could be found. Among the remaining 50 companies, 23 had introduced by the early 2000s the unitary share. Only one of them – Bank Julius Bär – had already a unitary share in 1990. The data provided in this section are my own calculations based on Bank Julius Bär (1991) and Orell Füssli (2001).

Moore and Rebérioux (2007) observed such a ‘convergence of interests’ between mangers and shareholders in the cases of the US and the UK.

Figures from: http://www.parlament.ch/homepage/ra-raete/ra-fraktionen.htm.

The popular constitutional initiative provides that 100,000 Swiss citizens can submit a proposal for a constitutional amendment to a popular vote.

The letter can be found in the Federal Archives at E4110 (B); 1992/175; vol.3.

Literally ‘Shareholders remain the stupid’ in reference to the famous one-liner attributed to the German banker Carl Fürstenberg according to which shareholders are stupid and impertinent: stupid, because they buy stock and impertinent because they expect a dividend for their stupidity.