International Management

Case studies

Law and Agency: The micro-foundations of institutional change in national governance systems

This ESRC funded project (RES-061-25-0518) (Principal Investigator: Gerhard Schnyder; PhD researcher: Philipp Kern) investigated the impact of changes in legal shareholder protection on firm-level corporate governance practices in the UK, Netherlands, Sweden, and Switzerland.

The study builds on recent scholarship on the role of laws and institutions in the shaping of national business systems and economies. Drawing on insights from legal theory, comparative legal studies, political economy, and organisational sociology, the project critically discusses existing empirical approaches to the investigation of the link between law and firm-level economic outcomes. So far, the project has produced three key findings which have been outlined below.

Key finding 1: The sense and non-sense of the use of indices in CG and management research

The key objective of the project was to develop a new shareholder orientation index (SOI) to assess the CG practices in large European companies. This strand of the research involved reviewing existing methodologies of measuring and rating CG practices, including commercial and academic CG indices (CGIs). While previous research on the quality of existing indices has identified different problems related to these methodologies e.g. concerning their predictive power, this research project has generated new insights in that it addresses not just the empirical weaknesses of CGIs, but also the lack of methodological rigour in index construction. This is an aspect of CGIs that has been very largely neglected in the literature. Virtually all existing CGIs, and authors using them, ignore issues of measurement reliability and validity, which are considered key criteria for good measurements in other areas of the social sciences. Therefore, rather than simply following existing methodologies which aggregate individual variables into an index – as was originally planned -, the project turned to explore ways in which to improve the quality of firm-level CG measures. In particular, indices should capture recent insights about the interplay between CG mechanisms stemming from the so-called ‘bundles approach’. To the best of our knowledge, this constitutes a completely novel approach to index construction in the field of CG research and will hence contribute greatly to the field.
So far, a working paper with the title ‘Measuring Corporate Governance: Lessons from the Bundles Approach’ has resulted from this key finding, which has been included in the Cambridge Centre for Business Research (CBR) working paper series.

Key finding 2:The “Law & Finance” school’s “thin” conceptualisation of law

A second key finding relates to the fundamental research question ‘does law matter for firm-level CG change?’ As part of the project, a literature review was conducted to identify the ways in which existing studies in the so-called ‘Law & Finance School’ (LFS) tradition empirically and statistically investigate the link between law and corporate outcomes. The project found that the LFS provides very little in terms of consistent conceptualisation of how law affects economic outcomes. This review has led to a paper (currently under review) co-authored with Ruth Aguilera (Northeastern University) and Mathias Siems (Durham University) that reviews 20 years of LFS studies and draws on legal theory to develop a more robust concept of law for empirical research.
The paper shows that the LFS only implicitly considers the issue of the concept of law issue and uncritically adopts a narrow conceptualisation of law. Indeed, it focuses on the classical notion that law impacts economic actors through i) threats of punishment or ii) economic incentives. However, legal scholarship has increasingly recognised that these two traditional channels of impact of law on economic outcomes are not the only – and possibly not even the most important – ways in which law affects corporations. At least one additional mechanism through which law impacts economy actors’ behaviours needs to be added; namely, the emission of normative signals that push actors to change behaviours towards more ‘appropriate’ ones independently of punishments or incentives. We argue that taking into account this third mechanism has important implications for the way in which empirical studies investigating the impact of law on corporate practices should be designed and key variables operationalised.


Key finding 3: Law matters differently in different countries

A third key finding emerges from the empirical analysis of the data collected for this project. Using econometric panel data regression techniques, the project found that contrary to existing studies that expect law to matter in the same way in any country, legal change does not lead to corporate change to the same extent in different countries.

In Anglo-Saxon countries, the effect of legal change on corporate behaviours is stronger than in most continental European countries. In the traditionally relationship-based Scandinavian countries, legal change appears to matter much less for changes in corporate practices than in the UK for instance. This may hint at law playing a different role in different countries depending on the institutional context and importantly alternative modes of governance such as networks. This paper thus contributes to the literature on institutional decoupling by suggesting that the decoupling of institutional rules from actual practices is a context-specific phenomenon.