1. ¹Department of International Economics and Management, Copenhagen Business School, Copenhagen, Denmark
2. ²Department of Business Administration, Lund University and School of Management and Economics, Växjö University, Lund, Sweden and Växjö, Sweden
3. ³Center for Corporate Governance and Department of International Economics and Management, Copenhagen Business School, Copenhagen, Denmark
4. ⁴Department of Sociology, Stockholm University, Stockholm, Sweden
5. ⁵School of Management, University of Agder, Kristiansand, Norway

Correspondence: Anna Stafsudd, Department of Business Administration, Lund University, PO Box 7080, Lund SE-220 07, Sweden. Tel: +46 (46) 222 01 86; Fax: +46 (46) 222 42 16; E-mail: anna.stafsudd@fek.lu.se

Abstract

This article addresses the role of formal institutions and informal networks on corporate governance practices. The existing corporate governance literature has mostly examined the formal institutions, such as the effect of legal systems. Our contribution is to consider the effect of informal 'small world' characteristics of ownership and board networks. We use the case of Scandinavia (Denmark, Norway and Sweden) to examine these effects. Our empirical results reveal large differences in formal board and ownership structures between the Scandinavian countries, but strong similarities in terms of law enforcement, political stability, government effectiveness, rule of law, control of corruption as well as voice and accountability. We find that all three countries can be characterized as 'small worlds' in which trust, information diffusion and reputation mechanisms are active governance mechanisms.