Relation‐based Versus Rule‐Based Governance Systems

• Published date: 01 September 2012
• Date: 01 September 2012
• Author: William Judge
• DOI: http://doi.org/10.1111/j.1467-8683.2012.00929.x

Editorial

Relation-based Versus Rule-Based

Governance Systems

William Judge

Editor-in-Chief

Acolleague of mine and former Associate Editor for this

journal, Shaomin Li, has written for many years about

relation-based versus rule-based governance systems. The

basic idea is relatively simple, but it is also powerful – rule-

based governance systems rely on public rules – formal laws

and government regulations to encourage and facilitate

economic exchange. In other words, economic transactions

are publicly ordered. In contrast, relation-based governance

systems rely on private guidelines – informal relationships

and norms of reciprocity – to encourage and facilitate eco-

nomic exchanges. In other words, economic transactions

are privately ordered (Li, 2009). A provocative insight from

Li’s framework is that the choice of governance system

is a matter of scale and stage of development – when the

economy is local and limited, relation-based governance can

be effective and eff‌icient. As the overall economy expands

and globalizes, it will lose its cost advantages and thus must

evolve into a rule-based governance system. Traditionally,

developed economies operate with rule-based governance

systems and developing economies operate with relation-

based governance systems. However, each national

economy is constantly evolving, and there is no pure gover-

nance type in practice.

It occurs to me that the articles in this issue reveal where

various economies exist within this typology, and provides

some nuanced insights into this overall governance perspec-

tive. Our lead article, authored by Pindado, Requejo and de

la Torre, explores the idea that family f‌irms use dividends to

overcome the potential agency problem associated with con-

trolling ownership by the family. Employing a longitudinal

sample of f‌irms in nine European countries, they f‌ind that

family f‌irms can alleviate expropriation concerns by making

higher dividend payments. However, the higher dividend

payments are primarily explained by family f‌irms with no

separationbetween the largest owner’s voting and cash f‌low

rights, and those with non-family second blockholders.

Hence, the size and type of the two largest ownership stakes

are highlighted in this multinational empirical study. In

Chapter 2 of Li’s (2009) book, he argues that there are three

types of trust used to govern economies: (1) generalized

trust, (2) family-based trust, and (3) extended particularized

trust. As such, this study appears to uncover how general-

ized and family-based trust interact to govern European

economies where concentrated family ownership is the

norm. Young and Marais are the authors for our second

study which examines CSR reporting in two diverse govern-

ment environments: Australia and France. Their examina-

tion of 220 Australian and French f‌irms in 2009 reveals

that CSR reporting is stronger and CSR practices are more

transparent in France than those in Australia. Interestingly,

industry characteristics override the inf‌luence of national

institutions in high-risk industries. Overall, it highlights the

relative institutional inf‌luence of national and industry

context for determining voluntary governance practices and

reporting procedures. In Chapter 4 of Li’s (2009) book, he

explores this idea that disclosed information is treated dif-

ferently in different governance contexts. This study sup-

ports that argument, and it ref‌ines this notion by bringing

into focus how industry context can inf‌luence governance

dynamics as well as the overall governance system.

Our third article focuses attention on governance within

China, a major transition economy with growing impor-

tance within the global economy. Using China’s 2003

banking reform legislation as a naturally occurring experi-

ment, Hsieh and Wu f‌ind that borrowers’ earnings manage-

ment behavior declined after the reform. Furthermore, they

report that this practice is more pronounced in state-owned

borrowers and lenders than in non-state-owned enterprises.

As such, this study suggests that China might be moving

slowly away fromits relationship-based to a more rule-based

economy, at least with respect to its state-owned enter-

prises. In Chapter 8 of Li’s (2009) book, he compares Russia’s

“big bang” approach to transition as opposed to China’s

gradualist approach. This study illustrates how governance

411

Corporate Governance: An International Review, 2012, 20(5): 411–412

© 2012 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2012.00929.x