Regulatory Dualism as a Development Strategy

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 15, 2010 at 8:54 am
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Editor’s Note: This paper comes to us from Ronald Gilson, Professor of Law and Business at Stanford and Columbia Law Schools, Henry Hansmann, Professor of Law at Yale Law School, and Mariana Pargendler, JSD Candidate at Yale Law School.

In our paper Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S., and the EU, which was recently made publicly available on SSRN, we examine the promise of regulatory dualism as a strategy to diffuse the tension between future growth and the current distribution of wealth and power. Countries pursuing economic development confront a fundamental obstacle. Reforms that increase the size of the overall pie are blocked by powerful interests that are threatened by the growth-inducing changes. This problem is conspicuous in efforts to create effective capital markets to support economic growth. Controlling owners and managers of established firms successfully oppose corporate governance reforms that would improve investor protection and promote capital market development.

Regulatory dualism seeks to mitigate political opposition to reforms by permitting the existing business elite to be governed by the old regime, while allowing other firms to be regulated by a new parallel regime that is more efficient. Regulatory dualism goes beyond similar but simpler strategies, such as grandfathering and statutory menus, by incorporating a dynamic element that is key to its effectiveness, but that requires a sophisticated approach to implementation.

A paradigmatic example of regulatory dualism is offered by Brazil’s “New Market” (Novo Mercado), a voluntary premium segment within the São Paulo Stock Exchange that allows companies to commit credibly to significant protection of minority shareholders without imposing reform on companies controlled by the established elite. Yet, regulatory dualism as a strategy for capital market reform is not unique to Brazil, nor is it suited just to developing countries. The long-standing U.S. approach to state-level corporate chartering is arguably better understood as a form of regulatory dualism than – as is the custom – as a form of regulatory competition and the same can be said of EU corporate law post-Centros. The dramatic failure of Germany’s Neuer Markt illustrates some of the pitfalls of regulatory dualism.

If thoughtfully deployed, however, regulatory dualism holds substantial promise in overcoming political barriers to reform, not just of corporate governance and capital markets, but of other economic institutions as well. With more systematic attention to the means of deploying the strategy, and more attention to the political forces whose opposition to reform it is intended to address, the scope for its successful application may continue to expand.

The full paper is available for download here.

  1. But too many regulations can make business development a complex issue, like in Germany which is an exceptionally regulated market.

    Since Germany is one of the main drivers of the EU, its educator so to speak, this insanity of regulating pretty much everything is being forced onto EU members.

    Since, however, some of these cultures are not used to this kind of political influence, they will sooner or later rebel.

    Other cultures, like Greece, are not really adapted to a monetary system; business is widely done by barter which almost led to the EU’s collapse earlier this year.

    Comment by Lars Hilse — August 2, 2010 @ 8:08 pm

 

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