Regulating Corporate Governance through the Market: Comparing the Approaches of the United States, Canada and the United Kingdom

I. INTRODUCTION The concept of corporate governance is not easy to define or evaluate. In 1992, Cadbury Committee described corporate governance as the systems by which companies are directed and controlled.1 Although never proven conclusively, many scholars of corporate governance assert that a company can increase its profitability by aligning interests of its management and its shareholder-owners.2 Even if effective corporate governance is only one element of a successful business,3 it can be an invaluable asset for a company seeking external financing. Indeed, a recent study revealed that investors are willing to pay eighteen percent more on average for equity of an American or a British company with strong corporate governance practices than for a company in a similar financial situation with a weak governance structure.4 The listing rules of New York Stock Exchange (NYSE), Toronto Stock Exchange (TSE), and London Stock Exchange (LSE) have significantly affected corporate governance of large, domestically incorporated, listed companies.5 The NYSE, TSE, and LSE all began as member-owned, self-regulatory organizations (SROs).6 The TSE and LSE recently demutualized, and NYSE is planning to convert into a forprofit entity in near future.7 This change in TSE and LSE prompted officials to evaluate whether each exchange still would be an appropriate regulator of listed companies. Similar to most other exchanges faced with this dilemma, TSE implemented several safeguards, but retained its basic SRO attributes as well as control over its listing rules;8 and listed companies arguably have not suffered from this oversight by a for-profit entity. The LSE relinquished its control over listing process, IMAGE FORMULA6 including its authority to administer exchange's corporate governance guidelines, to Financial Services Authority (FSA), a governmental entity.9 This Article asserts three contentions. First, it argues that stock exchanges with a quasi-self-regulatory structure are proper regulators of corporate governance in Anglo-American system. Quasi-SROs, like NYSE and TSE, possess flexibility and expertise necessary to respond to corporate governance issues. These exchanges can shift costs of monitoring listed companies' compliance with corporate governance rules to market participants. The governmental oversight inherent in a quasi-SRO mitigates some common problems with market-based regulation, namely, bias and inadequate enforcement. Next, this Article examines social, economic, and cultural framework in United States, Canada, and United Kingdom, in which each exchange's corporate governance rules operate. The unique environment in each country has impacted regulatory choices made by NYSE, TSE, LSE, and now, FSA. An exchange's ability to account for historical and cultural differences and institutional constraints will contribute to effectiveness or ineffectiveness of its corporate governance listing rules.10 Furthermore, many inadequacies in a system of market-based regulation are tempered by presence of other Anglo-American monitors of corporate governance, including governmental agencies, shareholders, and judiciary. Finally, this Article concludes that United Kingdom lost a valuable agent of corporate governance when FSA usurped LSE's role as U.K.'s listing authority after exchange demutualized. There is no evidence that demutualization impedes a quasi-SRO from effectively regulating corporate governance of listed companies,II and U.K.'s markets would be better served if LSE continued to regulate its own markets, much like TSE did after it demutualized. Although IMAGE FORMULA8 unique social, economic, and cultural conditions in Canada and United Kingdom are not identical to those in United States, experiences of demutualized TSE and LSE indicate that NYSE could make minor structural adjustments and remain an important regulator of listed companies' corporate governance. …

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