Is Economic Nationalism in Corporate Governance Always a Threat?

Martin Gelter is Professor of Law at Fordham University School of Law. This post is based on his recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

During the past decades, participants in corporate law and corporate governance academic debates around the world have generally been skeptical of policies implementing economic ‘Nationalism’ or ‘protectionism.’ While these are chiefly subjects of other areas of law, such as foreign direct investment or international trade law, literature in recent years has documented a close interaction with corporate law and governance. This paper argues that corporate governance policies intended to serve a particular country’s interest may not always be as bad as we usually think.

Economic protectionism and convergence in corporate governance

A key trend antagonistic to protectionism is international convergence in corporate governance, which partly developed from the larger globalization debate. During the 1990s and 2000s, scholars argued whether and to what extent corporate governance laws and practices would converge to a single model, with the likely endpoint being one that favors the interests of all equity investors collectively (rather than, e.g., controlling shareholders, the government, or employees). Ultimately, the convergence debate can be seen as a more prominent aspect of the globalization debate that took place at the time.

Participants in the convergence debate observed a growing propensity among multinational corporations to access capital markets, growing capital markets in many countries, the unraveling of control blocks, and a reduction of state ownership, all of which paralleled a partly convergent legal development. The direction of causality was not always clear. On the one hand, a system prioritizing the interests of all equity investors may be a precondition for capital market development and separation of ownership and control; on the other hand, causation may be reversed, meaning that a growing interest group of equity investors throughout society, including among beneficiaries of retirement plans, may have helped to make shareholder-oriented corporate law more politically acceptable.

From the perspective of many countries, minority shareholders such as institutional investors are often located abroad, whereas other interest groups, such as controlling shareholders or employees, have a more local base. Thus, protectionist policies typically disfavor those benefiting from convergence. Normatively, there is little space for a “national” interest or protectionist policies in a convergence model. Often firms’ increasing need to appeal to foreign institutional investors created pressure to take the welfare of these groups into account. Arguably, overseas investment is discouraged (and more expensive for investee firms) when investors are not well-protected against managers or controlling shareholders. Favoring influential domestic shareholders, labor, or the government as a controller would be antithetical to the interests of (foreign) outside investors. Thus, if firms that tap international capital markets and globalize their financial outreach are more competitive, one would expect nationalist or protectionist aspects to fade away from corporate governance because countries would find it in their interest to espouse a globalized shareholder primacy model.

Reasons for corporate governance protectionism

The COVID-19 pandemic continues a trend that began with the 2008/09 financial crisis, namely a cautious resurgence of protectionist policies. In various jurisdictions, these include instruments such as state minority ownership, loyalty shares, or the ability for firms to defend against hostile takeovers. Therefore, this article asks whether “protectionist” or “nationalist” policies may sometimes be justified or not as bad as we usually think.

First, the paper argues that economic openness, on which globalization and convergence in corporate governance rest, assumes that firms adhere ultimately to financial goals (for the benefit of their shareholders and potentially other stakeholders). Domestic firms facing foreign firms controlled by the respective government in pursuit of political ends are subject to unfair competition. Therefore, a country may seek to shield specific industries from such competition (including takeovers) to preserve the long-term viability of an enterprise, particularly when they seek to protect the supply chain or access to a crucial resource. “Openness” in corporate governance will thus not necessarily be in each country’s best interest.

Second, policymakers may not be aware that protectionist measures sometimes sustain a particular socio-economic model. Where a country’s model rests on specific institutional complements to maintain a specific bargain between capital and labor, foreign financial investors or multinationals will often be a disruptive force. Once they have bought their way into a country, “footloose” multinational firms may be more likely to close research activities or production at some point to transfer these activities elsewhere. Switching to a different model may at times be beneficial but will often come at a high cost triggered by disruption, or it may result in long-term harm. In addition, economic disruption itself may inflict damage by creating or amplifying political turmoil. The preservation of a particular arrangement may sometimes be necessary to maintain social peace and hence a jurisdiction’s productive capacity as such.

Third, while the long-run economic effects of COVID-19 appear to be highly industry-specific, a corporate governance system may benefit from the resilience of firms. There are multiple aspects to this, but what can be called the “embeddedness” of a firm into domestic economic networks is likely an instrument that helps firms survive crises. Such a network may be created by a group of firms with cross-ownership, a web of family firms benefiting from domestic social connections, and concentrated ownership in general. Connections to domestic lenders and other financial institutions will help, as will connections to (or even ownership by) a government that is likely to organize a bailout of firms or industries particularly hard hit by the crisis of the day. Protectionist corporate governance policies will strengthen internal ties that are unlikely to be replicated internationally.


Depending on the circumstances, “nationalist” or “protectionist” corporate governance policies will not invariably have adverse effects. Political leaders are responsible for the well-being of their constituents. While they will often be motivated by being reelected, policies from which constituents benefit seem legitimate. Even strong supporters of globalization in corporate governance must acknowledge the risk of backlash. Preempting a heavy-handed intervention that might come after a situation or political turmoil will likely be beneficial if the protectionist policies initially prompted are less harmful than those that might follow. A moderate level of protectionism may be better than a radical solution that inflicts severe long-term damage.

The full paper is available for download here.

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