CIAO DATE: 12/02

How Shareholder Reforms Can Pay Foreign Policy Dividends

James Shinn and Peter Gourevitch

Council on Foreign Relations

May 2002

Foreword

Corporate governance is not a traditional foreign policy topic. It is usually viewed more as an aspect of domestic politics, and of "low politics" at that, far removed from weightier security issues and remote from the traditional international economic agenda of trade and finance.

However, corporate governance is now receiving increasing attention in the media, in business, among investors, and among policy makers. It is no longer an obscure issue of concern to a narrow band of specialists, but a problem with broad areas of policy relevance.

The federal and state governments are currently debating several legislative proposals to "fix" our system of stockholdermanager relationships.

Yet the foreign policy implications of corporate governance are not widely appreciated by those debating the legislation. In this paper, James Shinn and Peter Gourevitch explore ways in which shareholder protections, at home and abroad, can affect vital U.S. interests. They demonstrate that corporate governance lies at the core of many trade disputes, though not usually recognized as such, and that it has implications for global financial stability. Governance failures are connected with corruption and money-laundering. And corporate governance practices abroad can affect, and possibly undermine, the unique securities regulatory approach at home, with its relatively light hand and extensive reliance on reputational intermediaries.

Despite its promise of paying foreign policy dividends, corporate governance reform is a controversial issue. There are strong lobbies on all sides. There is much intellectual disagreement. And governments themselves often have different stakes in the outcome of the corporate governance debate. As we pick our way through this complexity and controversy, Shinn and Gourevitch provide us with a way of structuring the debate and clarifying the goals.

They analyze the implications of corporate governance issues for foreign policy and propose a number of reforms, from an international agreement on corporate governance standards and accounting rules to changes in the laws governing hostile takeovers and international financial supervision. This paper, How Shareholder Reforms Can Pay Foreign Policy Dividends, is one of the first explorations of the corporate governance-foreign policy nexus. It will not be the last.

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