The Anglo‐Saxon Approach to Corporate Governance and its Applicability to Emerging Markets

• Author: Dennis C. Mueller
• DOI: http://doi.org/10.1111/j.1467-8683.2006.00503.x
• Published date: 01 July 2006
• Date: 01 July 2006

THE ANGLO-SAXON APPROACH TO CORPORATE GOVERNANCE AND ITS APPLICABILITY TO EMERGING MARKETS

207

© 2006 The Author

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CORGCorporate Governance: An International

Review0964-8410Blackwell Publishing Ltd. 2006

2006144••••ORIGINAL ARTICLES

THE ANGLO-

SAXON APPROACH TO CORPORATE GOVERNANCE AND ITS

APPLICABILITY TO EMERGING MARKETSCOPRORATE

GOVERNANCE

*Address for correspondence:

University of Vienna, Depart-

ment of Economics, BWZ,

Bruennerstr. 72, A-1210 Vienna,

Austria. Tel:

+

43 1 4277 37484;

E-mail:

dennis.mueller@univie.ac.at

The Anglo-Saxon Approach to

Corporate Governance and its

Applicability to Emerging Markets

Dennis C. Mueller*

Almost all firms start out as small, owner-managed companies. Many stay that way throughout

their lives. Some create attractive investment opportunities, however, that will allow them to

grow rapidly and become leading companies in their country. These firms typically do not

have sufficient internal funds flows and must turn to external sources of finance. Among these

is the issuance of equity. Once a firm sells shares, however, the cost of the managers engaging

in on-the-job consumption falls, and they can be expected to do so at the expense of their

shareholders. Knowing this, potential shareholders may be unwilling to purchase a new

offering of a young firm’s shares, and the firm with attractive investment opportunities is

unable to finance them. Strong corporate governance institutions help to protect shareholders

from the discretionary use of their firm’s resources. This paper reviews the case for having

strong corporate governance institutions to facilitate the creation of thick equity markets in

the context of developing countries in emerging markets, and examines the case for relying

on alternative sources of capital including the state.

Keywords: Corporate governance, capital markets, investment returns

Introduction

here has been considerable interest in

recent years in the topic of corporate gov-

ernance. Much of the focus has been on corpo-

rate governance systems in highly developed

countries. Is the Germanic corporate gover-

nance system best? The Japanese? The Anglo-

Saxon? Much less discussion of corporate

governance institutions in developing coun-

tries has taken place (see, however, Claessens

and Fan, 2002; Singh, 2003; Allen, 2005). This

paper examines some of the issues that arise

concerning different corporate governance

systems, focusing particularly on their rele-

vance for developing countries.

Central to any discussion of corporate gov-

ernance is the question of how well a particu-

lar set of institutions mitigates the various

principal/agent problems that arise in a firm.

T

We thus begin by reviewing the basic princi-

pal/agent problem and then go on to discuss

its relevance for developing countries. A cen-

tral question to be addressed in this discussion

is whether a so-called “Anglo-Saxon” system

of corporate governance is well-suited to

developing countries as opposed to some

other model. Although we shall stress the

advantages of the Anglo-Saxon model, we also

recognise that there may be more than one

route for development success. We begin,

however, by looking at agency problems.

Agency problems and agency costs

In the neoclassical theory of the firm, manag-

ers are assumed to maximise profits or share-

holder wealth. Implicitly the theory assumes

that the manager is also the sole owner of the