Regulated Corporate Governance Law Might Lead to Less Competition

A more regulated Corporate Governance law might lead to less competition. Do you agree? Discuss.

Corporate governance generally refers to the set of rule-based processes of policies, laws and accountability that governs the relationship between the investor (stockholder of a company) and the investee (management) and essentially all the stakeholders in a company.^[1] It deals with the agency problem: the separation of management and control. Corporate governance provides the framework for attaining a company’s objectives through integrity and transparency of financial and corporate operations, checks and balances with applicable laws, sound corporation operations that are in accordance with international standards. In terms of legality, laws must be clear and consistent: process of entry and exit of firms, asset protection of investors and a transparent legal system.

Competition is regarded as the driving force that disciplines firms by keeping them responsive to their markets enforcing them to adopt efficient practices and to maximize efficiency^[2]. Competition maximized incentives to innovate, engage in new promising activities and offer better services at lower prices.

A more regulated corporate governance law will not lead to less competition. In Saul Estrin’s paper, Djankov et. al found that entry costs are correlated with higher corrpution and larger unofficial sectors of the economy particularly in transition economies^[3]. Entry barriers in transition economies are significantly higher than in the west.This is due to an unregulated corporate governance law and entry costs will deter competition for firms. Hence, a more regulated corporate governance law will help lower entry barriers improving competition amongst firms.

However, a more regulated corporate governance could lead to less competition as this might operate as barrier to rapid and flexible response for some firms. Firms might believe that one of the ways to achieve a more effective balance between its commercial requirmenets and the needs of customers is to allow it greater self-regulation. A more regulated corporate governance law will enquire an increased concentration of ownership to establish relations between stakeholders, and this may impede product market competition.

We can look at this in another perspective. Although competition and corporate governance are complements, it can be argued that competition might act as a natural substitute for corporate governance. Product market competition should provide incentives for firms to adopt the most efficient corporate governance mechanisms as it provides incentives for managers to better align their interests with the shareholders. Particularly with transition economies where it has been observed that competition is more important than change in ownership and may provide managers with appropriate disciplinary mechanisms. Substantial increase in competition has been a major contribution to better incentives for efficient corporate governance in these economies^[4].