Many of the standard theories about governance focus on financial economics and the rule of law — regulatory systems in a legal framework. Can you explain the different angle you are coming from in this book?

A lot of decisions about how things get done and who gets to control what in firms happen in informal clubs rather than as a result of the rule of law. Take the question of who protects the minority investor. The usual answer in the United States is that the law protects minority investors. But consider Sweden, which has a large public sector and also has very advanced capital markets relative to its population. Well, Sweden doesn’t have many of the legal provisions you find elsewhere to protect minority investors — yet it has huge investor positions in its companies and its stock markets are thriving. Sweden’s minority investors do just fine. This is explained by the strong ties and clubbiness among Sweden’s investors and directors, who collectively ensure that minority investors get a fair shake. They sometimes live in the same part of Stockholm and many went to the same private schools and sit on one another’s boards. There is kind of a social regulation in Sweden that keeps an eye on abusive governance practices.

Countries vary. Norway has very weak director ties but strong ownership ties. In France, rugby is the power sport and it was once not unusual for major decisions to be considered over the course of a match. That seems silly on its face but it’s a reminder that in many parts of the world governance runs on what is sometimes called soft laws, where there are social mechanisms by which governance is exercised.

We show in the book how these clubs emerge; we show that they are fairly stable — they don’t break up. If we can understand how these small worlds and clubs emerge, that can tell us something about how to grow good governance structures and how to nudge poor governance structures toward better practices.

What triggered the research projects that are included in the book?

Governance is extremely challenging for boards and top executives to do well and it is also challenging to research, because it varies dramatically across countries and across legal forms. Consider just the differences between public firms and partnerships and the complex combinations of both that we see in private equity or investment banks that have gone public. When preparing students for international careers, it is obvious that power and influence arise from the social and political positions of families, education, the “party” as in China, or the military as in Israel. Governance is not just what happens on boards but who has access to resources and opportunities in a society.

We wanted to find a way to simplify this complexity by looking at simple rules that create the ties that exist among and across firms, owners, the state, and other actors. We use the science of networks to explore governance by creating simulations of governance networks. We say to the contributing researchers, if you think you understand a particular country’s governance patterns — why are or aren’t there many women on boards, for example, or whether only a few families sit on many boards, or whether board membership is very diverse or dispersed — then show you can make it happen in a simulation.

For example, business groups are very common, particularly in emerging markets. But they are not well defined. In Germany the term business group means one central firm holding many other firms while in Thailand it might mean many businesses controlled by a single family. There is a lot of suspicion in the business world about business groups, which are often cast as corrupt and opaque or as being run by families that seek to exploit minority investors and governments. There’s an unresolved debate about the overall merits of such groups.

With a simulation we can analyze other explanations for business groups and how they are structured. For example, the simple social rules that influence which sons and daughters inherit and how many kids become business people will affect the evolution of the family business and governance in a particular country. Given that, we project what the size of the family business will be over two, three, and four generations and how it will be owned. We try to explain these rules as coming out of family genealogies and offer evidence that it is primarily these family and cultural rules that generate the pyramidal structures we see, as opposed to these business owners sitting around trying to figure out how to rip off the government or minority investors.

This book is significant because of the way it analyzes the many forms that governance takes around the world, but also because of how you carried out the research. Why is your methodology so important?

In the social sciences, with luck, you wait two years before an article gets published. Increasingly, social scientists are working with researchers from the natural sciences, which has a much shorter publication timeline. How do we make this work?

One way we try to speed up the timeline for producing research is by creating a community of people to work together on the project. All the contributors had to provide data, so we’ve compiled a large data set and software tools to analyze it that will be made available on an open-source basis. The hope is that the project will have a life after the book and that researchers won’t have to spend time getting access to other people’s data — which is rarely quick or straightforward — as opposed to exploring what are the great questions of our time. Let’s get on with it.

Another important thing is that there’s a lot written about governance that says, hey, the best governance is in the United States or new best practices are coming out of Brazil or the worst governance is over here. Not surprisingly, a lot of countries take offense at the idea they produce bad governance structures. Taking into account that there are institutional micro-differences among countries is a less judgmental perspective, and it’s important to make sure we actually understand the long-term dynamics in these countries rather than judge them too quickly.

The research projects here focus on the 1990s through 2000. Why?

We measured the “small world” structures of each country based on two cross sections, one at the start of the 90s and other at around 2000 for all countries, and we also looked at the effects in the subsequent decade, meaning after 2000. The 1990s was a period of structural breaks: globalization emerged as a defining economic force, as did ideas about how to govern economies, such as privatization. As these ideas spread they caused fundamental shifts in the structure of national economies and the global economy.

In the last decade, Germany is one of the most interesting cases. The German government was deeply concerned about high wages, the rise of outsourcing, and the threat of cheap labor that came as Eastern Europe opened up. Suddenly Germany thought it better shake up business a bit — and it did, going full throttle toward a stock market and capital markets–driven system. The social democrats led these reforms and the unions supported them.

For example, under a socialist federal government, Germany allowed firms to restructure and to sell off businesses by private placements without paying capital gains taxes. Everything began changing very rapidly and the traditional clubs built around the banks began to erode. And then all of a sudden, German business realized they didn’t like the increasing pressure from capital markets and they stopped and even reversed some reforms, such as those pertaining to hostile takeovers. Though banks no longer play quite the role in owning pieces of German industry, the persistence of small world clubs are still evident in Germany.

What are some interesting places to watch in terms of governance?

India is interesting because there is a lot of foreign capital coming into the country through private equity, venture capital, big banks, and even sovereign funds. But Indian business groups, which tend to be family based, are very often controlled by promoters — whom we call founders. So there is the irony of strong family structures but with increasingly international players in the financial system. But what is really interesting are the directors. In India, the degree of connectivity among Indian boards is quite high — degrees being an indication of how many boards each director sits on and therefore how many other boards one board is connected to. In India many more people sit on six or seven or eight boards compared to other countries, so information travels very quickly, with a very high level of connectivity and reciprocity.

Contrast that with Mexico, which is not the best example of governance — it’s a story about Carlos Slim and the power of a very, very few people, not interconnectivity. There are small worlds and then there is one world, and Mexico is a sort of one-world place. Brazil in contrast has a much more diversified network among families and large firms, especially banks, and connections have emerged between investors and firms over the last 20 years.

What is the future of governance?

People today tend to think the world is so global, but if you look at telephone traffic it’s overwhelmingly local. It’s still a regional world and this is true for governance too. We haven’t developed social structures that can support good governance at the global level. And it’s the future of global governance that is vulnerable.

We’re entering an age where we’re going to see an increase in major ethical scandals because as the world does become more global, the national clubs actually break down in importance. National clubs can have bad features but they can also play positive roles, and we need clubs to communicate, coordinate, and govern now at the global level. This is a period of transition that requires more governance and, yes, clubs globally.

Bruce Kogut is the Sanford C. Bernstein & Co. Professor of Leadership and Ethics in the Management Division and director of the Sanford C. Bernstein & Co. Center for Leadership and Ethics at Columbia Business School.