The World Bank Research Observer Advance Access originally published online on February 21, 2006
The World Bank Research Observer 2006 21(1):123-150; doi:10.1093/wbro/lkj005
Enforcement and Good Corporate Governance in Developing Countries and Transition Economies
Erik Berglöf is chief economist of the European Bank for Reconstruction and Development, a professor, and director of the Stockholm Institute for Transition Economies at the Stockholm School of Economics and a fellow of the Centre for Economic Policy Research; his e-mail address is erik.berglof{at}hhs.se. Stijn Claessens is a professor of international finance policy at the University of Amsterdam, senior adviser to the Financial Sector Vice-Presidency of the World Bank, and a fellow of the Centre for Economic Policy Research; his e-mail address is sclaessens{at}worldbank.org.
More than regulations, laws on the books, or voluntary codes, enforcement is key to creating an effective business environment and good corporate governance, at least in developing countries and transition economies. A framework is presented to help explain enforcement, the impact on corporate governance when rules are not enforced, and what can be done to improve corporate governance in weak enforcement environments. The limited empirical evidence suggests that private enforcement tools are often more effective than public tools. However, some public enforcement is necessary, and private enforcement mechanisms often require public laws to function. Private initiatives are often also taken under the threat of legislation or regulation, although in some countries bottom-up, private-led initiatives preceded and even shaped public laws. Concentrated ownership aligns incentives and encourages monitoring, but it weakens other corporate governance mechanisms and can impose significant costs. Various steps can be taken to reduce these costs and reinforce other corporate governance mechanisms. But political economy constraints, resulting from the intermingling of business and politics, often prevent improvements in the enforcement environment and the adoption and implementation of public laws.
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