Privatization and Corporate Governance: The Lessons from Securities Market Failure

Abstract

This paper analyzes the comparative experiences of Poland and the Czech Republic with voucher privatization. Because of a number of similarities between these two transitional economies, it finds their comparative experience to provide a useful natural experiment, with the critical distinguishing variable being their different approaches to regulatory controls. However, while their experiences have been very different, their substantive corporate law was very similar. The true locus of regulatory differences appears then to have been the area of securities market regulation, where their approaches differed dramatically. Re-examining the work of LaPorta, Lopez-de-Silanos, Shleifer & Vishny, this paper submits that (1) the homogenity of both common law systems and civil law systems has been overstated; (2) common law systems in particular differ widely in terms of substantive corporate law, but have converged functionally at the level of securities regulation; (3) dispersed ownership will likely not persist under civil law systems that contemplate concentrated ownership and hence do not address or discourage rent-seeking corporate control contests or other forms of expropriation from minority shareholders; and (4) such "winner-take-all" control contests are probably most feasibly addressed through "self-enforcing" structural protections, such as (following the Polish model) the transitional use of state-created controlling shareholders. Reformulating the thesis originally advanced by LaPorta, et al., this article argues that civil law systems are not inherently unprotective of minority shareholders, but rather protect shareholders only against the forms of abuse that were well-known in systems of concentrated ownership (i.e., typically, abuse by a dominating parent) and not against the abuses that typically characterize systems of dispersed ownership (i.e., managerial expropriation and theft of the control premium). Ultimately, there is a conceptual mismatch between civil law systems and the dispersed ownership created by voucher privatization.