Law and Capitalism. What Corporate Crises Reveal about Legal Systems and Economic Development around the World

Citation

Mesure, H. and Leca, B. (2009), "Law and Capitalism. What Corporate Crises Reveal about Legal Systems and Economic Development around the World", Society and Business Review, Vol. 4 No. 2, pp. 159-161. https://doi.org/10.1108/17465680910965977

Both authors are among the world's leading comparative corporate law scholars. Curtis J. Milhaupt is a Columbia Law School's Fuyo Professor of Japanese Law and Professor of Comparative Corporate Law. He is also Director of the Law School's Center for Japanese Legal Studies. He was a mergers and acquisitions lawyer at Shearman & Sterling in New York and Tokyo from 1989 to 1994 and an international civil servant from 1997 to 2000. Milhaupt has published on corporate governance, organized crime, and the market for legal talent, and is the co‐author or editor of six books, including The Japanese Legal System: Cases, Codes and Commentary (Foundation Press, 2006); Economic Organizations and Corporate Governance in Japan: The Impact of Formal and Informal Rules (Oxford University Press, 2004); and Global Markets, Domestic Institutions: Corporate Law and Governance in a New Era of Cross‐Border Deals (Columbia University Press, 2003).

Katharina Pistor, a Professor of Law, joined the Columbia Law School faculty in 2001. Her fields of interest are comparative law; comparative corporate law and corporate governance, legal development in emerging markets, and European law. She has published widely on such topics as legal transplants and the comparative evolution of law. Pistor is a Co‐author of The Role of Law and Legal Institutions in Asian Economic Development (Oxford University Press, 1999) and has co‐edited Rule of Law and Economic Reform in Russia (Boulder Press, 1997) with Jeffrey D. Sachs, and Law and Governance in an Enlarged European Union (Hart, 2004) with George Bermann.

The book is born from the authors' common frustration about the state‐of‐art about the relationship between legal institutions and market‐oriented institutions or, to say it broader, between law and capitalism. Years of academicals discussions have reached to conclusion that law is essential to economic development as de Soto (2000)The Mystery of Capital showed it recently.

Our two authors critic the prevailing view according to law “fosters economics activity (exclusively) by protecting property rights” (p. 4). They caricature the canonical consensus by the following equality: good law + good enforcement = good economics outcomes. Therefore, their book is a contest of what they call “Weber's legacy”, an original and convincefull attempt to provide a new perspective on how law support markets. Their aim is to understand law's role in the economy over time and across countries; of what globalisation means for domestic legal development today. The book relies on an original analytical framework and a set of six relevant cases studies.

The analytical framework is reached from two authors' convictions. The first one is that law is not an endowment like capital activity. It is far more complex and subtle. They view the relationship between law and markets as a highly iterative process of action and strategic reaction that they call a “rolling relationship” between law and markets. The relationship is multidirectional. The second authors' conviction is that there is no single rule of law that maps onto real world economics success. There is no best legal way! They critic the idea according to which countries at a different stage of development, and with a different institutional starting point, should require the same set of laws to support economic growth. The standard approach assumes there is a single optimum model, but there are many systems out there and each has its own strengths and vulnerabilities. The two authors call their approach of law the “endowment perspective” (p. 17) that “depicts law as a kind of technology that can be inserted in the proper places – and imported from abroad when necessary – to accomplish an important task” (p. 5). The authors use corporate governance as a “windows” or a “lens” through which to analyse the relationship between law or legal institutions and economic system in a given country. For the authors, corporate governance, to say it shortly, is the complexes system by which firms are structured, financed and controlled. Legal systems can be analysed on the basis of a set of factors: the organization of the legal systems; the functions that law plays in support of market economy; the political economy for law production and enforcement. According this approach, law can play multiple roles in support markets: coordination, signalling, protection, enhancement and credibility. More, non‐legal mechanisms can also create these functions, even in developed countries, and compete with legal institutions. The demand for law is a crucial variable and the supply for law in not a neutral institutional. Thus, endowment legal reform is always a paradoxal action.

This analytical framework is applied to a set of six recent corporate governance scandals or controversies from around the world what authors call “institutional autopsies”. Rather than large numbers and statistical significance, Milhaupt and Pistor emphasize individual cases. And they concern themselves not with ordinary cases but with the most extraordinary ones: companies that face a crisis so dramatic it may alter the underlying governance system. Theirs is a study of governance in and from the ruins. The six institutional autopsies are a close examination of a firm level crisis, problem, or controversial governance event. The authors are therefore able to reveal deeper significance of the controversies or the scandals and what those scandals and controversies can say us about the relationship between legal institutions and capitalism. For each of the six cases studies authors describe the corporate governance scandal or controversies. Then, they situate it within countries institutional environment; evaluate response to firm level event and larger institutional response and, at last, draw conclusions, extending analysis backward and forward in time.

This previous elements explain the architecture of the book that is made of three parts. The first one is the conceptual one. The Chapter 1 is mainly a critical review of the (canonical) literature. The Chapter 2 exposes the analytical framework of the book. Part II is what can be called the clinical part since it is the application of the analytical framework to six cases studies or “institutional autopsies”. The Chapter 3 is dedicated to the Enron “disaster”; the fourth to the Mannesmann “scandal” in Germany; the fifth deal with the hostile takeover attempt by Livedoor in Japan; the sixth analyses the scandal of the SK group in Korea; the seven is about the China aviation oil crisis. The Chapter 8 autopsies Yukos and the struggle for control over natural resources in Russia. Part III extends the analysis by exploring the implications of the institutional autopsies. The Chapter 9 is a comparative systemic analysis of the functions and centralizations of lawmaking across countries. The Chapter 10 discusses about the legal change and its implication for foreign legal transplants, convergence and legal harmonisations. The 11th is the concluding chapter. Classically it contains the keys conclusions of the enquiry and proposes areas for future researches.

By considering that law is the product of human interaction, a perpetual process by which legal institution are formed and reformed, the authors belongs rather to the institutional family. They even recall Veblen's analysis. By underlying how each countries idiosyncratically “tampering” with legal institutions so that market can function and economic organization can be formed they recalled Montesquieu's approach of law. The authors suggest at least the following lesson. Instead of taking law as a given and assuming it is politically neutral, scholars should consider how and why it is produced and how the relevant parties respond to it. The book argues that policy makers, business leaders and scholars should not think it so rigidly. Law and markets evolve together in a “rolling relationship” based on events on the ground, and that calls for a more dynamic model of what promotes healthy economies. This book can be warmly recommended. It is an original book, very well structured, easily readable and full of “lessons”. It really contrasts with the scholar common soap about corporate governance and should become a “classic” of the field; at least for those who prefer to understand than to analyse!