The newsletter is distributed electronically to academics and practitioners active in corporate governance (regulation) and to interested individuals. Please send an email to James Perry if you wish to be added to or removed from the mailing list.

WELCOME!

Welcome to the second edition of this newsletter series published by the Amsterdam Research Centre for Corporate Governance Regulation (http://www.arccgor.nl/). The Centre is part of the Political Science Department at Vrije Universiteit Amsterdam.

The newsletter provides you with information on our current research projects and events taking place. Each issue also includes an editorial and, from time to time, short articles by our researchers.

Disclaimer

Opinions expressed by contributors in this newsletter do not necessarily reflect those of the Vrije Universiteit or those of our other researchers.

CONTACT US

We look forward to your comments and suggestions!

EDITORIAL

James Perry

In this – the second – issue of our ARCCGoR newsletter we have the pleasure of presenting an article by Stephen Davis, a leading consultant on corporate governance matters. In The Civil Economy, Davis outlines his vision for the role of corporate governance in the global political economy. Regardless of whether one shares this vision, Davis’ article raises a number of important questions for researchers in this field. As in this issue’s second article, written by Angela Wigger, a PhD researcher at ARCCGoR, the rise of private self-regulation is once again brought to our attention.

The rise of private self-regulation has also come to the attention of the recently appointed EU internal market commissioner, Charlie McCreevy, who previously trained and worked as an accountant. Mr McCreevy has been quite forthright in stating his view that the setting of accounting standards by the private International Accounting Standards Board (IASB) is not just a technical exercise – a sentiment broadly shared by the ARCCGoR team, and which applies equally to other forms of corporate governance regulation.

In particular, the commissioner has highlighted both the lack of political accountability and also the funding status of the IASB – it is largely funded by private corporations and partnerships . In a recent media interview, McCreevy expressed specific concern that the Commission has no direct say in the process of drafting new accounting rules which are now mandatory for more than 7,000 listed companies in the EU (as well as those in many non-EU states which also endorse the standards). Perhaps not coincidentally, the IASB’s parent foundation is currently in the process of reviewing its constitution, which includes the operating procedures of the IASB. It will be interesting to see what changes emerge and who drives them. Watch this space.

Return to newsletter contents

WORKSHOP REPORTS

Bastiaan van Apeldoorn & Laura Horn

Inaugural Workshop Amsterdam Research Centre for Corporate Governance Regulation (ARCGOR), Vrije Universiteit, Amsterdam, 17-18 December 2004

Our inaugural workshop was intended to present the Centre for the first time to the wider academic community and the general public. The other main purpose was to create a forum of scholars with related research interests to generate intellectual input into our programme and stimulate cross-disciplinary and cross-border intellectual exchange and co-operation. On both accounts, the workshop was very successful. As organisers we were pleased to invite to Amsterdam a number of leading scholars on the political economy of corporate governance, and have them present their latest work in three thematic sessions dealing respectively with the Transformation Of Corporate Governance Regulation In The EU, The Global Regulation Of Corporate Governance Standards, In Particular Accounting Standards, and The Effects Of External Factors On The Development Of Corporate Governance Structures In Central And Eastern Europe. These three empirical domains corresponded to the different research projects undertaken within the Centre.

The workshop was opened by Jan Klaassen, Emeritus Professor of Accounting at the Vrije Universiteit. Peter Gourevtich, Professor of International Relations at the University of California at San Diego, was the keynote speaker. He presented a lecture – based on his forthcoming book – on the politics of different corporate governance systems. Henk Overbeek, as programme leader of ARCCGOR, then presented the research programme we are currently undertaking together with Laura Horn, James Perry, Arjan Vliegenthart, and Angela Wigger (our four PhD students). The first day of the conference concluded with a very stimulating ‘round table’ discussion with Peter Gourevitch, Bob Jessop (Lancaster University) and Tony Porter (McMaster).

The second day was reserved for the closed workshop sessions in which our other guests (click here for a list) presented their work in what proved to be a very coherent set of panels (both within and across). The result was a full day of inspiring discussions which made all of the participants, and certainly the organisers, rethink many of their ideas about corporate governance regulation, thus providing a direct stimulus to further research. It is fair to say that all participants considered the workshop a great success, not only in terms of how it was organised, but in particular with regard to the level of discussions and the intellectual output it produced. As organisers, we were thus very happy with this first workshop and hope to be able to build upon this initial success in the further development of the Centre and of our research programme.

Return to newsletter contents

British International Studies Association Conference

University of Warwick, 20-22 December 2004

The British International Studies Association’s 29th annual conference took place at the University of Warwick shortly before Christmas. Warwick’s Department of Politics and International Studies at Warwick University hosted the conference which had more than 90 panels, offering a wide range of themes and fields of studies.

Within the field of (International) Political Economy, a variety of interesting panels took place throughout the conference, with the notion of ‘risk’ being one of the predominant concepts in these.

Members of ARCCGOR convened a panel with the title Global Capitalism and the Private Regulation of Business: A Power Shift? Despite the early morning slot, the impressive audience turnout suggested that there is a lot of scholarly interest in issues of private authority and power shifts within different varieties of capitalism. Timothy Sinclair (Warwick University) served as discussant for the panel, which started with a presentation by Bastiaan van Apeldoorn and Laura Horn (ARCCGOR) on their work on the EU Takeover Directive. Andreas Nölke and James Perry (ARCCGOR) then presented their paper on ‘International Accounting Standards and Transnational Private Authority’. Adam Harmes (Western Ontario) followed with his work on ‘Voluntary Codes of Conduct in Corporate and Global Governance’, in which he drew on the Gramscian concept of transformismo for theoretical underpinning. Timothy Sinclair commented positively both on the quality of the individual papers as well as on the coherence of the panel in general. The discussion with the audience, which included amongst others Phil Cerny, Marieke de Goede, Louise Amoore and Paul Langley, raised a variety of important questions and demonstrated the need for further research into the area of private authority and corporate governance regulation.

Return to newsletter contents

DVPW Sektionssitzung Politische Őkonomie “Die politische Ökonomie der Europäischen Wirtschafts- und Währungsunion“

Max-Planck-Institut für Gesellschaftsforschung, Köln, 3-4 December 2004

The IPE Section of the German Political Science Association organized a conference on the The Political Economy of European Market Integration and Monetary Union at the Max Planck Institute for the Study of Societies, Cologne, to bring together some of the leading scholars working within the field of IPE in Germany.

The conference organisers – Phillip Manow (MPIfG), Susanne Lütz (Fernuniversität Hagen) and Christoph Scherrer (Universität Kassel) – set up a very diverse and interesting presentation schedule for the two days. The great variety of contributions, both in methodological terms as well as in more general orientation, and topics, provided a generous overview over the state of the art within the field of Political Economy in German political science.

Corporate governance and the Varieties of Capitalism approach were among the key themes. Following a broad panel on Corporate Governance in Europe. This panel, which focused on the developments around the Takeover Directive, started with a presentation by Martin Höpner and Hellen Callaghan of their work on the left-right dimension of the 2001 rejection of the Takeover Directive in the European Parliament. As well as setting the context for our paper on The Takeover Directive in the context of European Market Integration (Bastiaan van Apeldoorn and Laura Horn), this also gave the panel a coherence which is hardly found at conferences. The ensuing discussion also proved to be very fruitful. Corporate governance (regulation) is slowly but steadily becoming an issue in German political science, and many participants of the conference clearly indicated their interest in the work of the ARCCGOR programme.

Return to newsletter contents

THE CIVIL ECONOMY

Stephen Davis, Guest Contributor

We speak of “civil society” to describe the array of institutions needed to maintain political democracy. Now, crises in the free enterprise system compel us to frame a parallel notion. Call it the “civil economy.”

Why do we need a new paradigm? Widespread public discontent over globalization is a symptom of a perilous fault line between the new realities of world capital markets and the increasingly outmoded ways in which traditional elites—both governmental and corporate—make economic decisions. The stability of global commerce may depend on a solution that bridges the gap of mistrust. Market players will have to create what amounts to a new international constitution of economic activity capable of drawing the confidence of publics around the world.

New understandings are called for because the fundamentals of commerce have changed dramatically and swiftly. Through most of the 20^th century, in nearly all countries, the state controlled key marketplace assets—from airlines to banks to utilities. Now, in the wake of the end of the Cold War, and the sweeping privatization and de-regulation that resulted, a host of rookie economic potentates have muscled their way onto the field.

First are giant private sector corporations, the principal inheritors of economic power. Second are their owners, institutional investors such as pension and mutual funds, who sink the savings of tens of millions of individuals into equity. A third new power—civil society organizations such as environmental lobbies, business and professional associations and trade unions—is expanding influence. All three constituencies are awakening to a striking fact: suddenly, they have displaced politicians and civil servants as the principal drivers of worldwide economic activity.

The architecture of global economic policymaking, however, is an anachronism. It continues to reflect a Bretton Woods-style assumption that marketplace rulemaking is the business exclusively of political leaders. Things are hardly better at the heart of the private sector itself. The architecture of economic management is ill suited to current realities. Corporate executives and controlling owners accustomed to wielding unfettered power are confronting challenges from minority investors local and foreign. Most corporate boards are at sea trying to figure out how to meet fresh pressure to monitor and improve their records on the environment, workplace issues and human rights. Making matters far worse, the governance of many institutional investor funds is equally troubled. And when such funds themselves are unaccountable, they too readily let torpor or commercial conflicts stop them from doing what they should: protecting their clients’ investments by serving as watchdogs against corporate malfeasance.

This yawning divide between post-World War II tradition and today’s reality is eroding the public mandate for economic arrangements that constitute a corporation’s implicit ‘license to operate.’ As more individuals quite rightly ask “Who are these people now running our lives?”—and as they get relative silence in response, we risk a mainstream backlash in many countries far more perilous to growth than stones hurled at McDonalds restaurants. The bottom line: we are in urgent need of a fresh central organizing principle that takes account of the new shape of economic growth, throws sunlight onto practices now hidden, and enfranchises new constituencies.

New Players.

The global market ideal implicit in a civil economy is one in which institutional owners, accountable to their millions of savers push, corporations toward sustainable prosperity through socially responsible management. Put as a simple equation, if accountability plus social responsibility equals shareowner value, we achieve the civil economy.

But how does a civil economy come about? In a civil society, political parties, an independent judiciary, a free press, impartial law and civic bodies are the core sustainers of democracy. Parallel institutions of a civil economy can be understood as engaged shareowners, independent monitors, credible standards and civil society organizations participating in the marketplace. Change occurs when these agents are mobilized, thus altering the infrastructure and rules, the unwritten constitution, of commerce.

Engaged Shareowners. In civil society, we talk of voters. In a civil economy, we address owners. Today, institutional investors managing the savings of tens of millions of people quietly own vast swathes of the market all over the world. But too many funds shirk their fiduciary obligation to savers and offer unquestioning obedience to corporate authority, Most funds fail to meet the bedrock governance standards they increasingly demand of companies. Many pension plans, mutual funds and unit trusts are inevitably hobbled by conflicts and do little to challenge wayward companies in which they own stock.

Through voluntary codes, law or regulation, institutional investors must become transparent and accountable. They must disclose regularly what guidelines they use in investing, including whether or not they consider social criteria and how they vote their shares. At the same time, market regulators should be vigorous in ensuring that funds operate solely in the interests of their clients, rather than for other conflicting business interests.

Academic and industry studies now overwhelmingly show that funds enhance the value of their investments if they are activist players in the marketplace. Benefits also flow to corporates. Companies that respond to watchful shareowners by improving governance can lower their cost of capital. Research further demonstrates that activism—and accompanying improvements in corporate governance—significantly boosts a country’s economy. In short, a civil economy of engaged shareowners pays.

Independent Monitors. In civil society, we expect the surveillance of a free press and the brawn of an independent judiciary to guard against tyranny. In a civil economy, we need a wide range of monitors that help make corporate behaviour transparent so that firms end up advancing the interests of the economy as a whole. Such monitors include, of course, media willing and able to scrutinize boards. They also include fair and vigilant regulators. But, in addition, we need a dynamic, worldwide industry of accountability screeners.

A great many bodies specializing in corporate governance already exist.. Specialized Internet services have joined them.. Other firms probe companies on their social, environmental or international security performance..

Some of these monitors have unresolved, and sometimes undisclosed, commercial conflicts of interest of their own. Their “constitutional” obligation in the new market is to address such tensions openly. But the biggest challenge facing accountability screeners is that many of them are barely commercial. Moreover, fund managers do not want to pay for monitors unless they have to. But more are finding they do have to, thanks to pressure from pension plan trustee boards or investor groups.

A civil economy hinges on the integrity of other intermediaries as well. Auditors have been badly tarnished by consulting conflicts. Actions by regulators and the professions must ensure that advice to shareowners is as independent as advertised.

Finally, new civil economy tools are beginning to appear in response to market demand. For instance, commercial services are offering investors quantitative ratings designed to measure a company’s governance risk. S&P produces issuer-commissioned ratings. And GovernanceMetrics International is pioneering worldwide risk ratings using more than 600 data points per company. For the first time, portfolio managers now have on their screens the ability to define “investment grade governance” when making buy and sell decisions. As such, companies are able to benchmark their own accountability practices against peers at home or anywhere in the world.

Credible Standards. Civil society depends on a web of law derived with the consent, and attuned to the social environment, of the electorate. In the world of owners, the invisible hand of accounting standards serves alongside law as a rough equivalent.. But do these buoys—long the handiwork of a priesthood of specialists—reflect the views and needs of modern investors? Shareowners must make judgments on a firm’s value and market price based in large part on analysis of financial information released by companies. But current conventions set in cement the great, ill-concealed secret of traditional accounting: rules greatly underrate the financial impact of a company’s relationship to employees and society at large.

No one knows this more than accountants themselves. Their firms are first among the many mainstream bodies scrambling to develop common measures of assets so hard to define that experts officially label them “intangibles.” such attributes are among the most powerful drivers of modern business success. Civil society organizations would call most of these social, or stakeholder, relationships. Entrenched accounting standards, by contrast, were developed in the manufacturing-centred era to compute the tangible assets—bricks and mortar—of a firm. As long as measurements fall so short, risks are opaque. Managers and investors alike find themselves unable accurately to price in the bottom line implications of a corporation’s social performance.

Here again, though, new powers on the ground are re-shaping market architecture. Solutions are emerging from groups never before involved in accounting standards. At the end of the day, universal adoption of such formats will hinge on whether civil economy institutions exercise sufficient clout on stock exchanges, standard setters and corporates. It may also depend on the willingness of governments and regulators to intervene in support of more accurate benchmarks of business achievement. If they succeed, though, proponents will have built a common financial infrastructure that effectively links social responsibility to shareowner value.

Civil Society Organizations as Market Forces. The success of a civil society rests on the proliferation and clout of non-governmental organizations working within the law for change. So does a civil economy, except that civil society groups must adapt their strategies to suit channels afforded by capital. Many still shun the market, hewing to the conventional Cold War habit of seeking solutions only at the political level. Some champion violent protest or use muscle for corrupt purposes, placing themselves decisively beyond the bounds of a civil economy. But others who understand the latent power of capital peacefully marshalled are paving fresh paths.

Trade unions in certain countries are among them. They press fund managers and, through them, corporations, to improve governance as well as employee relations.

Anti-poverty groups, too, have recently recognized advantages of mobilizing capital. In 2001 the London-based War on Want and Traidcraft Exchange issued a handbook guiding pension fund trustees and fund managers on means to push companies for responsible practices. In 2002, environmental advocates joined them en masse in embracing a shareowner agenda.

Groups such as these can themselves best enhance their legitimacy as players in the civil economy by meeting fundamental governance standards they demand of corporations. That, too, is a requirement of the implied constitution of the new capital market. Policies and leaders of non-governmental organizations should be fully accountable to their members, their actions and conflicts of interest transparent, and their means peaceful.

Pressed by their own members and clients, big funds too are acting on environmental and social issues, finding new ways to collaborate with each other within and across borders. Such efforts are giving rise to a growing population of civil economy groups such as the International Corporate Governance Network, the Canadian Coalition for Good Governance, the Global Institutional Governance Network and the Asian Corporate Governance Association. Academics are not far behind. Corporate governance centres are being founded nearly every month at universities around the world:. Research, international conferencing and networking are their top priorities.

Taken together, these fast-moving developments can be seen as knitting together a nascent market-based network of civil economy organizations bound to help shape the new face of enterprise.

Government’s Job

A new species of corporation naturally evolves when owners are energized, monitors are girded with safeguards against conflict, civil society organizations become a constructive market force, and performance yardsticks help managers and investors gauge real drivers of value. This kind of civil economy terrain spawns corporations skilled at cultivating commercial dynamism in a context of accountability and responsibility.

Evidence coming in from diverse markets already illustrates the evolution of a virtuous circle. Companies with active, long-term shareowners are ones that introduce more responsive governance and are more likely to produce higher returns, drawing in turn more long-term—and loyal—investors. Such corporations gain access to capital at a lower cost, giving them advantages over rivals. Accountability in all parties, in short, is surfacing as one of the most effective keys to unlocking sustainable value. It is, in effect, the “invisible hand” of the civil economy.

Governments are necessary partners in creating conditions for accountable commerce. They are the ultimate guarantors of rules applying to all parties. However, the most effective results come from intervention with a light touch, allowing market forces to do the heavy lifting. Indeed, most of what is needed from government is surgical adjustment of regulation and law. The beauty of that equation—small public expenditure yielding big results—is that it could be a winning platform for any political leader under pressure to spur both growth and social justice when there is little money in the public till.

At home, governments best capable of stimulating reform are those arising themselves from successful civil societies. They are inherently more stable. And policies grounded in democracy and exposed to public scrutiny inevitably yield wider acceptance and fairer implementation..

Lawmakers can aid the rise of a civil economy by promoting the development of domestic investing institutions: pension funds and shareholder associations. Further, governments can compel such funds to meet fundamental standards of accountability so that savers’ financial clout is exercised rather than disregarded, and aligned solely with the interests of savers. Individuals with money in pension funds should have rights to elect trustees, and gain regular updates on how asset managers vote and act on behalf of savers on corporate issues. Such measures wake up markets by empowering institutional owners and making them responsive to the interests of citizen pensioners.

Domestic policymakers must also ensure that those investors have the tools they need to act as real owners. To a large degree, this means a set of simple rules on disclosure. Every listed company should have to place all financial statements and regulatory filings on the web in a timely fashion.

Policymakers can spur a race to the top through tested measures such as best-practice company law, tough regulation and impartial prosecution, and codes covering board and disclosure standards. They can permit class action lawsuits, another brake on malignant management. All these actions can be understood as building an architecture and constitution of engaged owners and responsible corporations. But progress can be painfully sluggish where powerful interests resist the prospect of challenge. Nations with robust corporate governance traditions can help.

At the international level, glimmers of a new paradigm in economic decision-making are rare. But Governments continue to call the shots on trade rules, world debt and central banking. Still, doors are opening to the new grass-roots players of modern enterprise as recent developments at the UN and World Bank have shown. These developments signify only the start of a worldwide transformation of post-war economic life reflecting the profound democratization of capital power. After all, “the proper governance of companies will become as crucial to the world economy as the proper governing of countries,” observes World Bank president James Wolfensohn. But corporate excesses now so emblematic of globalization stir urgent dangers of public backlash. If un-channelled, such reaction could derail change rather than speed it. That is why public and private sector policymakers must understand that the prudent path to a new worldwide ‘constitution of the marketplace’ lies today in speeding the rise of a civil economy. In it, institutions promoting the fusion of accountability and commerce can ensure that globalization truly fulfils its promise of spreading sustainable prosperity.

Dr. Stephen Davis, is president of Boston-based Davis Global Advisors (www.davisglobal.com), an international corporate governance consultancy. He is also a founder of and partner in GovernanceMetrics, referred to in this article.

The above article is an abridged version edited for the ARCCGoR newsletter. The full text is feely available for download from davisglobal.com. It also forms the core of The Civil Economy: Code to the New Capitalism, by Stephen Davis, Jon Lukomnik and David Pitt-Watson. This book will be published by Harvard Business School Press in 2006.

Return to newsletter contents

THE CUTTING EDGE OF COMPETITION LAW AND CORPORATE GOVERNANCE IN EUROPE: PRIVATE SELF-ENFORCEMENT OF EUROPEAN COMPETITION LAW

Angela Wigger

While topics such as the Sarbanes-Oxley Act and its impact on European corporate governance regulation have gained increased scholarly attention, the recent European competition law overhaul or ‘modernization’ as the Commission’s officials call it, tends to be overlooked not only by commentators, but also by researchers in the field of political economy. Yet, the ‘modernization’ of the European competition regime represents an incremental change in the way in which anticompetitive conduct is prosecuted by exposing corporate actors to a range of new risks and challenges.

One important component of the 2004 reform package consists of the abolishment of the more than 40 year-old notification regime under which companies routinely have notified to the European Commission all kinds of envisaged commercial agreements and business practices other than mergers and acquisitions (i.e. all agreements that fall under Article 81 (TEC) including production and R&D joint ventures, alliances, licensing, franchising contracts). Under the new enforcement regime, companies cannot rely anymore on the Commission’s ex-ante approval, but have to assess by themselves whether or not a planned co-operative agreement falls into the category of cartels and other restrictive business practices.

The reliance on ‘market intelligence’ in spotting anti-competitive practices indicates a regulatory shift away from the supervision and enforcement of a public authority, towards private self-enforcement. European competition law enforcement has traditionally been the domain of the European Commission. With the abolition of the notification system companies are expected not only to police themselves, but also their competitors, distributors and suppliers. For the Commission it brings a substantial reduction in the number of instances under review. Moreover, national competition authorities and national courts, which until now have only been enforcing their own domestic competition laws, can now directly apply Article 81. In this way, additional staff resources at the Commission will be freed for the prosecution of international cartel activity. As former Commissioner Mario Monti argued in an speech held at the 8th Annual Competition Conference of the International Bar Association in 2004:

“[…] (T)he Commission’s role, as an antitrust enforcer, is not to give comfort.”

He compares notification procedure to parking a car in a town:

“Working through a pile of mostly innocuous notifications may have made sense 40 years ago: it simply does not make sense now. Any citizen must know whether he/she can park his/her car in the centre of the town. He or she shouldn’t have to go to the police station to check first.”

Underlying the rationale of Mr. Monti’s car analogy is a strong belief in the self-correcting mechanisms of a laissez-faire market-based economy. In this respect, the abolishment of the notification scheme for cooperative business agreements contributed to a much broader trend of reduced supervision and market intervention by public authorities.

Yet, private self-control in competition matters hinges upon a further power shift in economic life. As not many corporate actors possess in-house expertise in competition matters, the demand for legal services such as judicial advocacy and tailor-made compliance programmes increases, which benefits particular private actors who sell legal services. This is especially evident if one thinks of what happens when companies and their legal advisors assess the situation wrongly. If they are lucky: nothing. If not, they risk litigation in national or European courts. The new enforcement regime provides law companies specialized in competition questions with an additional playing field. It creates not only a market for advising companies on a regular basis on competition law compliance, but also for specialized litigators.

It should not come as a surprise that law companies and bar associations welcome the new system of private self-enforcement. As regular and influential guests in the preparatory stages of the reform package, they have displayed their expertise in the form of advisory reports to Commission officials. They continue to do so in the current formulation of possible avenues to promote enhanced private litigation in competition cases. The European Commission is currently considering a system of damage compensation, which should encourage affected parties such as competitors, supplier and distributor companies, as well as consumers and employees to bring infringements of competition law to the courts. Jurisprudence by the European Court of Justice (ECJ) has already levelled the road in this respect. In the Courage vs. Crehan decision of September 2001, the ECJ ruled that an injured party from an agreement falling under Article 81 must be able to obtain compensation for the losses suffered from an anticompetitive conduct. Furthermore, the Commission is considering means to mitigate sanctions for whistle blowers willing to cooperate with competition authorities, as well as leniency schemes for companies that have established compliance programs. In this context, a number of European governments are currently discussing the introduction of class action law into their legal system, which would allow individual and corporate plaintiffs to group together and collectively suit companies before the courts. While Sweden and the UK have already introduced the possibility for such lawsuits, Germany included a range of measures that facilitate private actions into its 7th amendment of competition law. The Dutch competition authority is currently considering such moves and in France, President Chirac has recently instructed his government to put forward initiatives for the introduction of class actions. Similarly, several EU Member States are currently considering moving towards a system of criminal prosecutions, which would allow imprisonment of individuals involved in a collusive business agreement.

The 2004 competition reform finds itself at the cutting edge of corporate governance in Europe. The introduction of a class action system in Europe has long been requested by various shareholder rights organizations, since it provides an opportunity to compel the resignation of ‘traitorous’ CEOs. In particular recent corporate scandals have heightened the demand for increased ‘market justice’. Similarly, the criminal prosecution of company directors has been suggested as a way to spare shareholders from the fines imposed on companies. Although the process of sanctioning anticompetitive conduct is likely to be a combination of pecuniary fines, restitution payments and criminal prosecution (as can be seen in countries with a civil liability scheme for anticompetitive conduct), the request for altering the balance of economic power in favour of shareholder groups is clearly there.

With the increased emphasis on private self-enforcement in competition matters and the discussion of introducing subsequent legal modifications that facilitate private actions before the courts, all signs are set to promote a culture of litigation. In this respect, the reform illustrates convergence towards the US system, where 90% of all antitrust cases are private actions. Although competition authorities in Europe have always relied on private complaints, private actions constitute only 5% of all cases. Sceptics fear the advent of a US-style claimant’s culture driven by profit motives. No other jurisdiction is as generous as the US in terms of damage compensation, where successful plaintiffs can be awarded up to three-time the damage suffered. Due to a range of further facilitating features such as a ‘no-win, no-fee’ practice in the form of contingency fees offered by law companies, the US legal system has made it particularly attractive for private actors to initiate legal proceedings against large corporations.

Corporate actors in Europe see more harm than actual good in the new situation. Examples of bankruptcy cases resulting from heavy financial sanctions and hostile takeovers are many. Yet, proponents celebrate the arrival of new litigation possibilities as an avenue for consumer and labour organizations, as well more diffuse interests such in society, to curb the abuse of massive economic power in order to establish a particular ideal of market justice.

Companies fear that the new regime leads to a situation of increased legal insecurity. Prior to the reform, they could rely on the legal permission granted by the European Commission to proceed with an agreement. Under the new system of self-assessment, they have to carefully analyze the markets in which they operate. Yet, as markets are very dynamic, novel situations without judicial precedents are very likely, exposing companies to new risks. Moreover, analyzing anticompetitive conduct is not an exact science with precise guidelines as to what is an infringement and what is not. On the contrary, there is always a subjective and speculative element in judging anticompetitive behaviour.

Ironically, while in the EU all signs are of convergence with the current US legal culture, the Bush administration is currently forbidding certain litigation practices in order to curtail a litigation culture that has run out of control. Commentators joke that due to Bush’s anti-litigation stance, law companies increasingly start to promote the gospel of class actions lawsuits abroad. With regard to EU, the current discussion actually suggests that this joke hits dead on target.

For more on this topic, please see the working paper ‘Revisiting the European Competition Reform: The Toll of Private Self-Enforcement’.

Return to newsletter contents

RECENT PUBLICATIONS RELATED TO ARCCGoR’S RESEARCH

ARCCGoR Staff

Michel Aglietta and Antoine Reberioux. (2005) Corporate Governance Adrift. A Critique of Shareholder Value. Cheltenham: Edward Elgar (forthcoming in spring)

(in french: Michel Aglietta.and Antoine Rebérioux (2004), Dérives du capitalisme financier. Paris: Albin Michel)

James Gaa (ed.), Special Issue on Accounting Ethics, in: Business Ethics Quarterly, Volume 14 Issue 3

Jeffrey Gordon and Mark Roe (eds). (2004) Convergence and Persistence in Corporate Governance. Cambridge University Press 2004

Peter Gourevitch and James Shinn (2005) Political Power and Corporate Control: The New Global Politics of Corporate Governance. Princeton University Press (forthcoming in summer)

Paul Langley (2004) 'In the eye of the "perfect storm": the final salary crisis and financialisation of Anglo-American capitalism', New Political Economy, 9:4, pp. 539-558.

Jaques Richard. (forthcoming). “The concept of fair value in French and German accounting regulations from 1673 to 1914 and its consequences for the interpretation of the stages of development of capitalist accounting.” Critical Perspectives on Accounting (in press, available online with subscription)

Timothy Sinclair, The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness, Cornell University Press: Ithaca March 2005

Freely downloadable working papers of the Vrij Universiteit Amsterdam Political Science Department

Return to newsletter contents

THE AMSTERDAN RESEARCH CENTER FOR CORPORATE GOVERNANCE REGULATION

Department of Political Science, Vrije Universiteit Amsterdam

Postal Address Visiting Address

De Boelelaan 1081c Buitenveldertselaan 3

1081 HV Amsterdam 1082 VA Amsterdam

The Netherlands

Telephone: +31 20 444 6894/6852

Fax: +31 20 444 6820