Corporate Networks as Informal Governance Mechanisms: A Small Worlds Approach to Sweden

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: It is proposed that informal governance mechanisms such as social control, in the form of norms and corporate networks, may complement formal governance mechanisms, such as laws, in providing investor protection. Research Findings/Results: A comparison of stock markets and investor protection for Denmark, Germany, Italy, Sweden, the UK, and US shows that the Swedish stock market is larger and more vital than would be expected from an evaluation of its formal investor protections. Subsequent analyses show that Scandinavian business standards are of the highest level, with the UK, the US, and Germany close behind, and Italy last. Comparison of owner networks using small world methodology show that whereas Germany has the most connected network, Sweden has a far tighter one than Denmark, Italy, the UK, and the US, being the least connected network of all. Theoretical Implications: The findings suggest that social norms upheld in a close network may complement formal investor protection, but perhaps not substitute for it. Thus, more research on the importance of informal governance mechanisms is called for in addition to the study of formal ones. Practical Implications: The results of this study strengthens the idea that there may not necessarily be one ideal corporate governance system, but that such systems develop historically according to path-dependent antecedents, with time finding their own balance. As such, the recent diffusion of Anglo-American corporate governance norms may prove upsetting to these systems, as their values may clash with already existing ones.

Doxa of Shareholders and Owners: On the Threshold of Financialization

“…The emergence of concentrated control was further supported when the Swedish Social Democratic Party gained power in the 1930s (Henrekson & Jacobsson, 2003;Schnyder, 2012;Stafsudd, 2009). The so-called Swedish model evolved, which aimed to foster economic growth while maintaining labour peace through negotiating the division of industrial value added between unions, industrial sectors and the state.…”

“…As the original entrepreneurs left their corporations to their heirs, financing the growth of the corporations became a problem, and the control of the corporations often reverted to the banks (Glete, 1994). A pattern emerged in which banks played a major role as shareholders in corporations and controllers of the management (Högfeldt, 2005;Stafsudd, 2009). After the financial crises in the early 1930s, however, new regulations were imposed whereby banks were no more allowed to own corporate shares.…”

“…In the last 35 years, however, the Stockholm Stock Exchange has boomed (Stafsudd, 2009), and Sweden has embarked on a journey towards financialization (Belfrage, 2008;Belfrage & Kallifatides, 2016). During the 1980s, the Swedish stock index rose from 5.7 to 72.7 (Affärsvärldens index).…”

“…The system of controlling shareholders, however, has persisted during this period, supported by the dual-share system and regulatory changes (Henrekson & Jakobsson, 2012;Jonnergård & Larsson-Olaison, 2016). Both the public and researchers have maintained the view that the Swedish corporate governance system is dominated by controlling shareholders who, in order not to damage their reputations (Stafsudd, 2009), have not expropriated minorities. This view is present in the international literature as well.…”

“…For example, Gilson (2006) used Sweden as an example of how controlling shareholders lower the agency cost associated with management more than they expropriated the minority shareholders. The explanation is said to lie in the social benefits of being regarded as a good controlling shareholder, and the social prestige following from this conception being high and coveted (Sinani et al, 2008;Stafsudd, 2009). A good reputation, therefore, seems important for the controlling shareholders, and the threat of reputation loss must be considered as a governance mechanism for controlling them.…”