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Institutional Change in Contemporary Capitalism: Coordinated Financial Systems since 1990

Published online by Cambridge University Press:  13 June 2011

Pepper D. Culpepper
Pepper D. Culpepper
Affiliation:
Harvard University
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Abstract

What happens when the unstoppable force of liberalization collides with the immovable object of national financial institutions in the advanced industrial democracies? To answer this question and evaluate alternative mechanisms to explain institutional change, this article examines the cases of the three large European economies with concentrated share ownership—France, Germany, and Italy. In the formal legal mechanism, interest coalitions adopt new laws, leading actors to deviate from formerly stable patterns of behavior in shareholding. In the joint belief shift mechanism, collective actors use a triggering event to jointly reevaluate their views of how the world works and thus how their interests can best be pursued. Using the metric of patient capital, this article shows that institutional change took place in France but not in Germany or Italy, despite the fact that Germany and Italy experienced significant regulatory change in the area of corporate governance while France did not. This evidence fits joint belief shift and is inconsistent with the formal legal mechanism. It is likely that the importance of the two mechanisms of institutional change depends on the degree of strategic interdependence among institutional actors: where it is high, the joint belief shift mechanism is likely to precipitate change; and where it is low, the formal legal mechanism is likely to precipitate change.

Type
Research Article
Information
World Politics , Volume 57 , Issue 2 , January 2005 , pp. 173 - 199
Copyright
Copyright © Trustees of Princeton University 2005

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References

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22 Hall and Soskice (fn. 1); Yamamura and Streeck (fn. 1); Amable (fn. 1); Schmidt (fn. 1).

23 Cf. Helmke and Levitsky (fn. 6).

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27 Roe (fn. 11), 50–61. Roe's argument challenges the conventional orthodoxy in law and economics—that of La Porta et al. (fn. 10)—which tries to link differences in the extent of minority shareholder protection to legal traditions, with civil law countries producing lower shareholder protections than common law countries.

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30 North (fn. 5), 86.

31 An exception is Luong, Pauline Jones and Weinthal, Erika, “Contra Coercion: Russian Tax Reform, Exogenous Shocks, and Negotiated Institutional Change,” American Political Science Review 98 (February 2004)CrossRefGoogle Scholar; they develop a rationalist framework for explaining the emergence of a new tax code in Russia as a case of institutional change. These actors are not figuring out the new context of the world together, as in the joint belief shift mechanism, but are instead simply signaling a changed willingness to cut deals with each other. The insufficiency of the formal legal mechanism in explaining institutional change is underlined by their observation that some types of interdependence make changing laws useless absent a change in common knowledge.

32 Aoki (fn. 5), 233–44; cf. Culpepper, Pepper D., Creating Cooperation: How States Develop Human Capital in Europe (Ithaca, N.Y.: Cornell University Press, 2003)Google Scholar.

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36 Aoki (fn.5), 242.

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38 Aoki (fn. 5), 241.

39 Cf. Lohmann (fn. 33). Lohmann emphasizes the informational content of different sorts of actors engaging in costly behavior. Unlike Lohmann, I argue that this action by a central actor does more than reveal information that leads other actors mechanically to revise their estimates of how other actors will behave; it also jars them into reconsidering their own models of causation about the functioning of existing institutions.

40 Sewell (fn. 35).

41 Hall and Soskice (fn. 1).

42 Amable (fn. 1), for example, provides probably the most extensive, empirically grounded statistical analysis of the distinctions among modern capitalist institutions. His analysis of financial systems shows that discernible gradations exist between systems of largely market-driven finance (including the U.S. and the U.K.) and the ideal “intermediated” financial systems (including France, Germany, and Italy). He describes finance in such systems as characterized by “a supposedly active involvement of intermediaries in firms' monitoring and strategy making, diminishing uncertainty and allowing for the realization of long-term strategies by supplying 'patient' capital” (p. 253). Amable's work supports the claim that these three countries lie at the opposite extreme from the market-based system of the LMEs. Schmidt (fn. 1), in her threefold typology of capitalisms, also identifies ownership concentration and strategic shareholding as core to both the German and the French models, even though she emphasizes that the French system of shareholding owes more historically to state policy than does its German counterpart (pp. 119–25).

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45 In the two decades prior to 1990, stock market capitalization in these countries was almost stagnant: moving from 16 percent of GDP in 1970 in France to 26 percent in 1990; 16 percent in 1970 in Germany to 21 percent in 1990; and 5 percent in 1975 in Italy to 13 percent in 1990.

46 Schmidt, Vivien, From State to Market? The Transformation of French Business and Government (New York: Cambridge University Press 1996)Google Scholar.

47 Morin, Francois, “A Transformation in the French Model of Shareholding and Management,” Economy and Society 29 (February 2000)CrossRefGoogle Scholar; Schmidt (fn. 1), 123.

48 Jackson (fn. 2), 274–75. It is frequently argued that the German banking system constitutes a fundamental element of patient capital for the large firms in Germany. This appears on available evidence to be false. While financial firms certainly have significant holdings in other corporations in Germany, recent studies suggest that, throughout the period of the 1990s, banks did not play a role in German corporate governance distinct from that of other large shareholders. See Edwards, Jeremy and Nibler, Marcus, “Corporate Governance: Banks Versus Ownership Concentration in Germany,” Economic Policy 30 (October 2000)Google Scholar; Jenkinson and Ljungqvist (fn. 43); Windolf, Paul, Corporate Networks in Europe and the United States (New York: Oxford University Press, 2002), 45CrossRefGoogle Scholar. Thus, pace Jackson (fn. 2) and Hopner (fn. 3), changing strategies by German banks do not constitute a serious threat to the stability of the system of cross-shareholding in Germany, as long as they do not trigger a broader change in behavior among nonfinancial companies and individuals.

49 Melis, Andrea, “Corporate Governance in Italy,” Corporate Governance: An International Review 8 (October 2000)Google Scholar.

50 Aganin, Alexander and Volpin, Paolo, “History of Corporate Ownership in Italy,” European Corporate Governance Institute Working Paper 17/2003 (Brussels, 2003)Google Scholar; Bianchi, Marcello, Bianco, Magda, and Enriques, Luca, “Pyramidal Groups and the Separation between Ownership and Control in Italy,” in Barca, Fabrizio and Becht, Marco, eds., The Control of Corporate Europe (New York: Oxford University Press, 2001)Google Scholar.

51 CONSOB, “Relazione per l'anno 2002 della Commissione Nazionale per le Societa e la Borsa” (Rome, 2003), 203Google Scholar; Richard Deeg, “Institutional Change and Path Dependency: The Transformation of German and Italian Finance,” in Streeck and Thelen (fn. 20).

52 Aganin and Volpin (fn. 50).

53 CONSOB (fn. 51). Some journalists have pointed to the erosion of the position of Mediobanca, formerly at the center of Italian ownership networks, as a symbol of potential change in the Italian system; cf. Kapner, Fred, “Italy's Reformers,” Financial Times, April 7, 2003, 13Google Scholar. However, as Deeg has shown (fn, 51), Mediobanca never defected from the system of patient capital; its management was simply ousted. This managerial change had no effect on effective ownership concentration in Italy, as shown in Table 1.

54 These data actually understate the difference in ownership concentration among large firms in France and in Germany, because Germany has many more large firms that are privately held instead of being publicly traded. Among global (non-American) privately held companies, fourteen of the largest thirty are German; only three of the largest thirty are French; “Largest Non-U.S. Foreign Companies,” Forbes, November 12, 2004Google Scholar.

55 Hopner (fn. 3), 138.

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58 Amable (fn. 1), 259—61. German industrial companies appear to value controlling shareholding heavily, as their stakes are much larger than those held by banks: “The median size of blocks held by industrial firms is 70 percent, which is substantially larger than for both individuals and banks (18 and 15 percent, respectively). This finding suggests that firms, banks, and individuals have very different motives in holding voting blocks. Firms appear to value majority control, while individuals generally own only a minority block. We find further that industrial firms control the largest percentage (26%) of all officially listed shares.” See Becht, Marco and Boehmer, Ekkehart, “Voting Control in German Corporations,” International Review of Law and Economics 23 (March 2003), 13CrossRefGoogle Scholar.

59 Unless otherwise noted, all data on changes in French share ownership come from the Lereps Database of the University of Toulouse.

60 Goyer, Michel, “Corporate Governance, Employees, and the Focus on Core Competencies in France and Germany,” in Milhaupt, Curtis, ed., Global Market, Domestic Institutions: Corporate Law and Governance in a New Era of Cross-Border Deals (New York: Columbia University Press, 2003)Google Scholar. In 2001 foreign investors owned only 14 percent of equity in German listed companies and 6 percent of the equity in Italian listed companies. See Wojcik (fn. 56), 1443; CONSOB (fn. 51), 202. These data are not directly comparable to those on France, since they refer to listed companies generally and not merely to the largest companies.

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63 Ibid.; La Porta et al. (fn. 10).

64 Among large company deals (those where the deal price was above $100 million), there were three successfully completed hostile takeovers in France between 2000 and 2004; two of those deals involved purchases by foreign (British and Canadian) companies. During the same time period , there was one large hostile takeover in Germany (by an Italian company) and none in Italy; SDC Platinum Database of Worldwide Mergers and Acquisitions, 2005, http://www.tfsd.com/pdfs/sdcplatinum_pg.pdf). Thanks to Mauro Guillen and William Schneper for suggesting this data source.

65 Morin (fn. 47), 49.

66 Gourevitch and Shinn (fn. 9).

67 LaPorta et al. (fn. 10).

68 In LaPorta et al.'s (fn. 10) initial rankings, the United States and the United Kingdom had the highest antidirector indices (5), while Belgium had the lowest (0).

69 Pagano and Vblpin (fn. 9).

70 There is no evidence of anything happening before 1995 that triggered the change in France. Indeed, the OECDs interpretation of France in 1994 was one of stable cross-shareholdings. See Deeg, Richard and Perez, Sofia, “International Capital Mobility and Domestic Institutions: Corporate Finance and Governance in Four European Cases,” Governance 13 (April 2000), 129CrossRefGoogle Scholar.

71 Morin, François, “Le Modèle Français de Détention du Capital: Analyse, Perspective et Comparaisons Internationales” (Paris: Ministere de l'Économie, des Finances et de l'lndustrie, 1998), 22Google Scholar; Vincent (fn. 61).

72 Schmidt (fn. 1), 382.

73 Cf. Vincent (fn. 61).

74 Ibid.

75 Schmidt (fn. 1).

76 Vincent (fn. 61). In gathering information about the breakdown of the noyaux dun following AXA's acquisition of UAP, I have benefited from several exchanges with Gregory Vincent, whose research on the process of breakdown provides the best empirical evidence I have seen about this episode.

77 AXA/UAP's combined shareholdings in nonfinancial companies in its network were all relatively minor (below 5 percent of their outstanding shares). As such, selling those shares alone would not have destabilized the existing network, absent selling by other shareholders. AXA/UAP's shares of financial companies were more substantial, as it held blocks larger than 10 percent of the shares of both BNP and of Paribas. BNP merged with Paribas in 1999; cf. Vincent (fn. 61).

78 Lordon, Frédéric, “La 'Création de Valeur' Comme Rhétorique et Comme Pratique,” L'Année de la Régulation 2000 4 (2000), 151Google Scholar.

79 Vincent (fn. 61).

80 Cf. Hopner, Martin and Jackson, Gregory, “An Emerging Market for Corporate Control? The Mannesmann Takeover and German Corporate Governance,” MPIfG Working Paper 01/4 (Cologne, 2001)Google Scholar.

81 Ibid., 25.

82 North (fn. 5).

83 Helmke and Levitsky (fn. I

84 LaPorta et al. (fn. 10); Pagano and Volpin (fn. 9).