Corporate Misgovernance

Topics: World Bank, Executive director, Non-executive director Pages: 29 (9787 words) Published: December 9, 2012
Corporate Misgovernance
at the World Bank
Ashwin Kaja
Eric Werker
Working Paper
09-108
Copyright © 2009 by Ashwin Kaja and Eric Werker
Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.

 
Corporate Misgovernance at the World Bank
Ashwin Kaja
Eric Werker*
Abstract
We test for evidence of corporate misgovernance at the World Bank. Most major decisions at the World Bank are made by its Board of Executive Directors. However, in any given year the majority of the Bank’s member countries do not get a chance to serve on this powerful body. In this paper, we empirically investigate whether board membership leads to higher funding from the World Bank’s two main development financing institutions, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). We find that developing countries serving on the Board of Executive Directors can expect an approximate doubling of funding from the IBRD. In absolute terms, countries serving on the board are rewarded with an average $60 million “bonus” in IBRD loans. This is more likely driven by soft forces like boardroom culture rather than by the power of the vote itself. We find no significant effect in IDA funding.

March 2009
*
Harvard Law School and Harvard Business School respectively. E-mail addresses: kaja@post.harvard.edu; ewerker@hbs.edu. We thank Tiffany Chan, Axel Dreher, Jeff Frieden, Arif Lakhani, Tracy Li, Linda Liu, James Vreeland, Matt Young, Kenny Mirkin, and seminar participants at the Political Economy of International Organizations and International Political Economy Society meetings for insightful conversations and feedback, and Byron Hussie, Michael Sorell, and James Zeitler for excellent research assistance. Werker is grateful to the HBS Division of Faculty Research and Development for generous funding support. The usual disclaimer applies.

1 Introduction
Any large public organization faces a challenge of representation and management. Since all decisions cannot be made by all members, founders often grant a more nimble body with decision-making powers. But representatives on the decision-making body may face a temptation to govern in the interests of their own wallet or narrow constituency rather than in the interests of the larger body.

Recently-convicted U.S. Senator from Alaska, Ted Stevens, serves as a vivid example. As The New York Times reported:
In his four decades in the Senate, and especially in his former role as chairman of the Appropriations Committee, Mr. Stevens dispensed untold millions of dollars worth of favors, especially to his home state. He clearly felt no compunction about accepting favors in return (Oct 2008).

While representing Alaska in the Senate, Stevens and his friends received tens of thousands of dollars in illegal gifts. And while chairing the powerful appropriations committee, he favored his home state at the expense of others. This anecdote is not an isolated example. Since the seminal work of Ferejohn (1974), political scientists have found that membership on powerful committees allows members of the U.S. Congress to bring home the “bacon” to their constituencies (Ray 1981; Rundquist, Lee, and Rhee 1996; Carsey and Rundquist 1999; Rundquist and Carsey 2002). There is a parallel, though surprisingly thin, literature in corporate finance and law that examines how corporate board members can 1

benefit from their positions at the expense of the larger company (Bebchuk and Fried 2004; Brick, Palmon, and Wald 2006).
With all this work in the domestic arena, surprisingly no studies have empirically investigated misgovernance at an international appropriations committee.1 This is a significant omission. After all, there are large bodies of research that examine the distributive...

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