The role of informal institutions in corporate governance: Brazil, Russia, India, and China compared

Abstract

This paper argues that the role of informal institutions as well as formal ones is central to understanding the functioning of corporate governance. We focus on the four largest emerging economies: Brazil, Russia, India, and Chinacommonly referred to as the BRIC countries. Our analysis is based on the Helmke and Levitsky framework of informal institutions and focuses on two related aspects of corporate governance: firm ownership structures and property rights; and the relationship between firms and external investors. We argue that for China and some states of India, "substitutive" informal institutions, whereby informal institutions substitute for and replace ineffective formal institutions, are critical in creating corporate governance leading to enhanced domestic and foreign investment. In contrast, Russia is characterized by "competing" informal institutions whereby various informal mechanisms of corporate governance associated with corruption and clientelism undermine the functioning of reasonably well set-out formal institutions relating to shareholder rights and relations with investors. Finally Brazil is characterized by "accommodating" informal institutions which get around the effectively enforced but restrictive formal institutions and reconcile varying objectives that are held between actors in formal and informal institutions.

Cross-listing and the scope of the firm

“…Although institutional pressures may come from both formal and informal constraints, in situations where the formal institutions are unclear, the informal institutions play a larger role in conferring legitimacy (Peng et al, 2009: 68). Given the relatively underdeveloped formal institutions in EE, firms in EE may be especially influenced by informal institutions (Estrin & Prevezer, 2011). Siegel (2005) makes a distinction between formal market mechanisms (i.e., legal bonding) and informal market mechanisms (i.e., reputational bonding).…”

“…The diffusion of cross-listing among leading firms in EE may follow a similar informal logic. Existing work in finance has rarely focused on the impact of such informal norms behind cross-listing-a missing gap that strategy and IB scholars may start to fill (Estrin & Prevezer, 2011;Siegel, 2005Siegel, , 2009). …”

Does the Institutional Environment Affect CSR Disclosure? The Role of Governance

“…However, the control exercised by the government in Relation-Based environments can trigger a general mistrust in the information provided, and companies feel less pressure to disclose about their practices (Lattemann et al, 2009 Previous research about CG in Brazil (Black et al, 2010) pointed out the need to strengthen the BDs of Brazilian companies since they have boards too small to be effective, and a significant percentage of Brazilian boards has no independent directors at all. This problem is common to most BRICS countries (Estrin & Prevezer, 2011 …”

Theoretical Foundations

“…In the absence of formal institutions, informal institutions may fill the gap (Peng, 2003). Yet in other context, such as Russia in the 2000s, informal institutions can in fact undermine the effectiveness of formal institutions (Estrin & Prevezer, 2011).…”

“…potentially conflicting institutions, and the impact of such conflicts on business. Beyond the longrecognized tensions between formal and informal institutions in transition contexts (Estrin & Prevezer, 2011;Peng, 2003), these trends point to intensified tensions between national and sub-national institutions, between national and supra-national institutions, and between headquarters and subsidiary normsespecially in a world where Western norms are no longer accepted as baseline in case of conflicts.…”