Political Yardstick Competition and Corporate Governance in the European Union

The question whether regulatory competition in the area of company law could take place in the European Union (EU) in a way similar to the form it takes in the United States (the Delaware phenomenon) is topical because of some recent judgments of the European Court of Justice (Centros) and documents and projects produced by the European Commission. That question is typically discussed, however, as if voters did not count and as if competition among governments was exclusively based on the mobility of firms across jurisdictions. But intergovernmental competition can also take the form of yardstick, or relative performance, competition. Voters and democratic politics then become essential. Voters assess the performance of incumbents by comparing what obtains in their own and in other jurisdictions. The first part of the paper is devoted to spelling out some characteristics of the mechanism. It stresses in particular that, depending on circumstances, yardstick competition may provide office-holders with the wrong incentives. This insight is important in the EU context. The second part stresses some aspects of the peculiar path followed by European integration. One important property is that Europe is under construction, entailing a tendency for integration to be monotonous. The process of integration can slow down or stall but seldom if ever regress. This has consequences on yardstick competition as well as on the kind of policies to be expected from the European Union (EU). The third and fourth parts of the paper are devoted to corporate governance and law making in the EU context and in the light of the foregoing analysis of yardstick competition. Two points are stressed. The nature of yardstick competition among the governments of the member countries of the EU may explain that differences in company law and corporate governance can subsist without preventing a strong convergence of economic outcomes. Yardstick competition between the EU as a whole and other parts of the world, however, is likely to start a dynamic process that could lead to the centralization of a large part of company law-making at the EU level and the emergence of a distinctive legal environment for firms doing business in Europe.