On the Origin of (Corporate Governance) Species

Corporate governance structures interact deeply with the political arena through party systems, political orientations of governments and coalitions, votes of stakeholders (workers, shareholders, etc.), ideologies, and interest groups. To fully understand the core aspects of governance in large corporations, one must attend to politics. This ‘political economy’ of corporate governance should, however, follow an evolutionary approach.

Although economies, business practices, and living standards have converged since WWII, corporate structures continue to differ among the advanced economies of the world. Looking at the diversity of corporate structures of large-sized firms around the world (and over time) would fascinate Charles Darwin. In a paper forthcoming on the Journal of Economic Survey, I develop a critical review of the literature on the political determinants of corporate governance through the Darwinian theory (including some Lamarckian aspects). As Darwin, in his work “On the Origin of Species”, explicates the diversity of species of tortoises, finches and iguanas of the Galapagos Islands, so Darwinism may contribute in understanding the origin and the persistence of corporate diversity. In particular, my paper takes into account politics-driven variations, their inheritances, and the subsequent selection of advantageous ‘corporate’ attributes.

Such an evolutionary approach is able to revise two crucial predictions of the mainstream literature of Law and Economics:

1. The prediction of convergence: the corporate governance structure with diffused shareholders (as opposed to the structure with blockholders) is the inevitable path for all countries.
2. The prediction of efficiency: firms with competitive advantages under the most efficient structure of corporate governance should displace those governed by suboptimal alternative governance structures.

As in the process of evolution biological systems carry the baggage of their own history, so does corporate governance everywhere bear the imprint of the historical path through which it has evolved and reflect the influence of a variety of political determinants. In this respect, political conditions affect economic outcomes, that is, the corporate governance species. However, there is not only causation from politics to corporate governance structures. I argue that the reverse causation can also be observed: the corporate governance species calls for certain policies and politics; in particular, constituents of the corporations (i.e. workers, managers and owners) as voters, interest groups and/or lobbyists support policies and politics that are best aligned with their (corporate) interests.

Hence, I define a circular co-evolution between the species (i.e. the corporation) and its environment (i.e. the political context), and argue that this circularity may lead to different, persistent and sometimes (in)efficient economic equilibria.

Finally, the concept of selection in my paper also includes human reasons: institutions are selected by people, not by nature (i.e. natural selection). Indeed, institutions change because individuals are moved by an effort to realise their aspirations, inter alia, via politics. Following the intuitions of Old Institutionalists, like Thorstein Veblen and John Commons, I argue that the evolution of institutions, in general, and corporate governance, in particular, are characterised by a Lamarckian mechanism: The members of a species (e.g. the constituents of corporations) consciously and purposively affect their environment. In biology, there are no Lamarckian species and ‘artificial’ selection, while in socioeconomic systems, agents can, and apparently do, purposively (i.e. artificially) modify the underlying codes (i.e., the environment) that enable meaningful social and economic interactions (such as the relationships among stakeholders within a corporation).

Massimiliano Vatiero is a Senior Assistant Professor of Law and Economics at the Università della Svizzera Italiana (Lugano, Switzerland).