Historical Perspective on Changes in Institutional Diversity

Path dependency, according to Roe, makes it difficult for institutions to converge, due to each economy's historical and political legacy. In the US, the result of distributed ownership prevalence can be attributed to their political inclinations to reject concentrated industrial and financial monopolies by their historical elites. In Europe, social democratic features which favour labour and other interests geared to promote citizen welfare and prevent large discrepancy gaps can be credited to their socialist inheritance. Pinto too attribute to the socio-political effects of fascist and communist regimes to have impacted on the institutional design, while Fligstein and Freeland accredits the country's broader political and institutional implications to have engineered the systematic outcomes of corporate governance. They consider the timing of entry and process into industrialisation and institutionalisation, state role over regulation of private property and competition between businesses, and social organisation of the national elites.

On this basis, Germany's pre-war trajectory demonstrates their preference for cartel rather than mergers, and internal corporate growth instead of talent acquisition, which still endures in modern norms of corporate governance, such as stakeholder-relationship, two-tier board system and highly specialised employee training. By contrast, historical dominance of diversified (M-form) corporations and distributed banks which characterise US economy highlights its orientation to markets and acquisitions of ideas and talents by its corporate executives.

Alternatively, Rajan and Zingales interprets that distributed ownership in US is the result of securities and equity market and acceptance to foreign investments, whilst protectionism, not social democracy, was what fostered concentrated ownership and historically anti-competitive market in Germany. It would appear the unique historical and political trajectories of economies preserves the argument for institutional diversity.

Viewed from the lens of law, the contrast of dispersed and concentrated ownerships, in LMEs and CMEs respectively, are the direct result of different degrees of shareholder protection afforded by each jurisdiction. It is suggested convergence or divergence align with how laws promote or hinder it, such that where insufficient legal guarantees are given to shareholders, only concentrated ownership can exist. Conversely, where laws afford greater protection for shareholders, more dispersed ownership is likely to emerge.

Coffee addresses the inherently decentralised characteristics of common law systems as better equipped to adapt to new developments flexibly and offer greater scope of protection through the operations of private and semi-private regulated entities. Whereas the civil code states hold strict centralised control over legislative and judiciary institutions, making it harder for shareholder protection to adapt intuitively, resulting in greater concentration of ownership in Germany and other parts of Europe.

That said, although Coffee supports the association of law and forms of corporate governance in shareholder ownership orientation, he sustains it is in reverse which one affects the other. Where La Porta et al. starts with legal protection as indicator towards market's demand in ownership-orientation, Coffee examples is following amendments to Company Act in subsequent years, and similarly in the US with federal securities laws in 1940s, as evidence that public market demands shape the law. The relationship of market institutions and law to formulate corporate governance affirms the validity of institutional diversity, and convergence less likely.

Considered from a more cultural perspective, according to Fukuyama, businesses are essentially an amalgamation of trust. Therefore, rules which govern its corporate decision-makers can only be sourced from that spectrum of trust relations. Licht, who explored the links between corporate governance and national culture, concluded that 'all path dependencies' coalesced into the culture of a nation, and as such the development of its laws, institutions, and corporate governance, followed that causality. Furthermore, the systematic cultural characteristics corroborated in how corporate governance laws were expressed. For example, common law jurisdictions generally provide better minority shareholder protection, however, similar protection were also exhibited in English speaking regions elsewhere. Additionally, he criticises the idea of convergence within the context of cultural complementarities. Without observation to the appropriate cultural values, any convergence-led corporate law reforms would quickly be undone due to its context incompatibility, and surmises that the problem of corporate governance is not a singular but of several issues, needing simultaneous consideration to effect enduring change.

Corporate governance is ultimately a system for power governance within a business organisation. To restrict the misuse of such powers, all vested interests must be considered as part of corporate fiduciary duties, which are inherently shaped by the diversities of cultural context.

Institutional complementary perspective can further clarify the implausible notion of convergence under the Anglo-American governance model. The essence of institutional complementarities is their interdependent synergy to complement and improve the efficiencies of each other's spheres of institutions. As one feature cannot operate isolated, a removal of certain elements is also not feasible. Similarly, a transplant of foreign formalities into the existing interconnected system not only creates problems but eventually reverses the original insertion. This principle also applies to corporate governance and finance systems. Without addressing target institution's underlying habitat, convergence towards institutionally irrelevant corporate model is unlikely to occur.

Economies with small institutional distance can theoretically adopt elements of another system, as a way to transition into a better economic position. However, not only are there multiple seen and unseen equilibria to consider, but evidence also suggest direction towards Anglo-American form of corporate governance does not necessarily equate to economic success. They too have their unique path dependency and underlying complementarities which is unlikely to be replicated in other economies.