Archive for the ‘corporate governance models’ Category

The Cultural Dependence of Corporate Governance

In September 2011, the Corporate Secretaries International Association (CSIA) hosted an international corporate governance conference in Shanghai, jointly with the Shanghai Stock Exchange.  CSIA represents over 100,000 governance practitioners worldwide through its 14 company secretarial member organizations. Speakers and panellists from Africa, Australia, mainland China, Hong Kong SAR, India, the UK and the US plus delegates from the 14 CSIA member countries discussed the cultural dependence of corporate governance.  For more information on CSIA see http://www.csiaorg.com

The conference considered whether corporate governance principles and practices around the world were converging.  Would a set of world-wide, generally-accepted corporate governance principles eventually emerge?  Or was differentiation between corporate governance practices inevitable because of fundamental differences in country cultures?  

Speaking at the conference the writer of this blog suggested that:

“A decade or so ago, it was widely thought that corporate governance practices around the world would gradually converge on the United States model.   After all, the US Securities and Exchange Commission had existed since 1934, sound corporate regulation and reporting practices had evolved, and American governance practices were being promulgated globally by institutional investors.  But that was before the collapse of Enron, Arthur Andersen, the sub-prime financial catastrophe, and the ongoing global economic crisis.  A decade ago it was also believed that the world would converge with US practices because the world needed access to American capital. That is no longer the case. So the convergence or differentiation question remains unanswered. 

Forces for convergence

“Consider first some forces that are leading corporate governance practices around the world to convergence.

Corporate governance codes of good practice around the world have a striking similarity, which is not surprising given the way they influence each other.  Though different in detail, all emphasise corporate transparency, accountability, reporting, and the independence of the governing body from management, and many now include strategic risk assessment and corporate social responsibility.  The codes published by international bodies, such as the World Bank, the Commonwealth of Nations, and OECD, clearly encourage convergence.  The corporate governance policies and practices of major corporations operating around the world also influence convergence.

Securities regulations for the world’s listed companies are certainly converging.  The International Organisation of Securities Commissions (IOSCO), which now has the bulk of the world’s securities regulatory bodies in membership, encourages convergence.  For example, its members have agreed to exchange information on unusual trades, thus making the activities of global insider trading more hazardous. 

International accounting standards are also leading towards convergence.  The International Accounting Standards Committee (IASC) and the International Auditing Practices Committee (IPAC) have close links with IOSCO and are further forces working towards international harmonization and standardization of financial reporting and auditing standards.   US General Accepted Accounting Principles (GAAP), though some way from harmonization, are clearly moving in that direction.

In 2007, The US Securities and Exchange Commission announced that US companies could adopt international accounting standards in lieu of US GAAPs.   However, American accountants and regulators are accustomed to a rule-based regime and international standards are principles-based requiring judgement rather than adherence to prescriptive regulations.

Global concentration of audit for major companies in just four firms, since the demise of Arthur Andersen, encourages convergence.  Major corporations in most countries, wanting to have the name of one of the four principal firms on their audit reports, are then inevitably locked into that firm’s world-wide audit, risk analysis and other governance practices.

Globalisation of companies is also, obviously, a force for convergence. Firms that are truly global in strategic outlook, with world-wide production, service provision, added-value chain, markets and customers, which call on international sources of finance, whose investors are located around the world, are moving towards common governance practices. 

Raising capital on overseas stock exchanges, also encourages convergence as listing companies are required to conform to the listing rules of that market. Although the governance requirements of stock exchanges around the world differ in detail, they are moving towards internationally accepted norms through IOSCO.

International institutional investors, such as CalPers, have explicitly demanded various corporate governance practices if they are to invest in a specific country or company. Institutional investors with an international portfolio have been an important force for convergence.  Of course, as developing and transitional countries grow, generate and plough back their own funds, the call for inward investment will decline, along with the influence of the overseas institutions.

Private equity funding is changing the investment scene.  Owners of significant private companies may decide not to list in the first place. Major investors in public companies may find an incentive to privatise. Overall the existence of private equity funds challenges boards of listed companies by sharpening the market for corporate control. 

Cross-border mergers of stock markets could also have an impact on country-centric investment dealing and could influence corporate governance expectations; as could the development of electronic trading in stocks by promoting international securities trading.

Research publications, international conferences and professional journals can also be significant contributors to the convergence of corporate governance thinking and practice.            

Forces for differentiation

“However, despite all these forces pushing towards convergence, consider others which, if not direct factors for divergence, at least cause differentiation between countries, jurisdictions and financial markets.

Legal differences in company law, contract law and bankruptcy law between jurisdictions affect corporate governance practices.  Differences between the case law traditions of the US, UK and Commonwealth countries and the codified law of Continental Europe, Japan, Latin America and China distinguish corporate governance outcomes.

Standards in legal processes, too, can differ.   Some countries have weak judicial systems. Their courts may have limited powers and be unreliable.  Not all judiciaries are independent of the legislature.  The state and political activities can be involved in jurisprudence. In some countries bringing a company law case can be difficult and, even with a favourable judgement, obtaining satisfaction may be well nigh impossible.                

Stock market differences in market capitalisation, liquidity, and markets for corporate control affect governance practices.  Obviously, financial markets vary significantly in their scale and sophistication, affecting their governance influence.

Ownership structures also vary between countries, with some countries having predominantly family-based firms, others have blocks of external investors who may act together, whilst some adopt complex networked, leveraged chains, or pyramid structures.

History, culture and ethnic groupings have produced different board structures and governance practices. Contrasts between corporate governance in Japan with her keiretsu, Continental European countries, with the two-tier board structures and worker co-determination, and the family domination of overseas Chinese, even in listed companies in countries throughout the Far East, emphasise such differences.  Views differ on ownership rights and the basis of shareholder power.

The concept of the company was Western, rooted in the notion of shareholder democracy, the stewardship of directors, and trust – the belief that directors recognise a fiduciary duty to their company.  But today’s corporate structures have outgrown that simple notion.  The corporate concept is now rooted in law, and the legitimacy of the corporate entity rests on regulation and litigation. The Western world has created the most expensive and litigious corporate regulatory regime the world has yet seen.  This is not the only approach; and certainly not necessarily the best.  The Asian reliance on relationships and trust in governing the enterprise may be closer to the original concept.   There is a need to rethink the underlying idea of the corporation, contingent with the reality of power that can (or could) be wielded.  Such a concept would need to be built on a pluralistic, rather than an ethnocentric, foundation if it is to be applicable to the corporate groups and strategic alliance networks that are now emerging as the basis of the business world of  the future. 

Around the world, the Anglo-Saxon model is far from the norm. A truly global model of corporate governance would need to recognise alternative concepts including:

  • the networks of influence in the Japanese keiretsu
  • the governance of state-owned enterprises in China, where the China Securities and Regulatory Commission (CSRC) and the State-owned Assets Supervision and Administration Commission (SASAC) can override economic objectives, acting in the interests of the people, the party, and the state, to influence strategies, determine prices, and appoint chief executives
  • the partnership between labour and capital in Germany’s co-determination rules
  • the financially-leveraged chains of corporate ownership in Italy, Hong Kong and elsewhere
  • the power of investment block-holders in some European countries
  • the traditional powers of family-owned and state-owned companies in Brazil
  • the domination of spheres of listed companies in Sweden, through successive generations of a family, preserved in power by dual-class shares
  • the paternalistic familial leadership in companies created throughout Southeast Asia by successive Diaspora from mainland China
  • the governance power of the dominant families in the South Korean chaebol, and
  • the need to overcome the paralysis of corruption from shop floor, through boardroom, to government officials in the BRIC and other nations.

The forces for convergence in corporate governance are strong. At a high level of abstraction some fundamental concepts have already emerged, including the need to separate governance from management, the importance of accountability to legitimate stakeholders, and the responsibility to recognize strategic risk. These could be more widely promulgated and adopted. But a global convergence of corporate governance systems at any greater depth would need a convergence of cultures and that seems a long way away.

Bob Tricker

5.11.2011

 

Corporate governance is a meme

Corporate governance first appeared as a subject during 1980s. The first book to use the title ‘Corporate Governance’ was published in 1984 (1) . In 1988, Cochran and Wartick (2) published an annotated bibliography of corporate governance publications: it had just 74 pages. Yet within twenty years Bing had over 8 million references to corporate governance and Google over 10 million.

During the twentieth century the work of boards of directors was seldom mentioned, the focus was on management. But within a couple of decades the phrase ‘corporate governance’ has become commonplace. The challenges of corporate governance are discussed in the popular press as readily as in business journals and the academic literature. Moreover, interest in the subject is world-wide.

Research into corporate governance began during the 1980s. The research journal Corporate Governance – an International Review was founded in 1992, the year in which Sir Adrian Cadbury published his seminal UK corporate governance report. Much of the early research in corporate governance originated in the United States, but as Denis and McConnell (3) have reported “the first generation of international corporate governance research typically examined governance mechanisms such as board composition and equity ownership in individual countries, mirroring the U.S. research that had preceded it. The second generation of international corporate governance research, however, recognized the impact of differing legal systems on the structure and effectiveness of corporate governance and compared systems across countries.”

Why has the subject of corporate governance grown so fast and the concept become so widespread? Some suggest it has been a response to company collapses, fueled by board-level corruption and the abuse of power. Others see a growing societal dissatisfaction with corporate behaviour. Dawkins (1998) has another idea (4). He suggested that culturally-determined ideas are transmitted from person to person. The development of ideas is analogous to the natural selection, replication, and mutation of physical genes, he suggests, coining the word ‘memes’ to cover such transferrable ideas. In other words, successful ideas propagate and spread, poor ones become extinct. So it may be with corporate governance.

(1) Tricker, R I, 1984, Corporate Governance – practices, procedures and powers in British companies and their boards of directors, Gower Publishing Aldershot UK, and The Corporate Policy Group, Nuffield College, Oxford.

(2) Cochran, Philip L and Steven L. Wartick, 1988, Corporate Governance – a review of the literature, Morristown, Financial Executives Research Foundation

(3) Denis, Diane K. and John J. McConnell, 2001, International Corporate Governance, Journal of Financial and Quantitative Analysis, 38: 1-36

(4) Dawkins, Richard, 1998 (2nd edition) The Selfish Gene, Oxford, The Oxford University Press, page 192

Rethinking the Exercise of Power over Corporate Entities

Society, acting through their legislative processes, provides for the incorporation of corporate entities in their midst, and permits companies to limit the liability of their shareholders for the debts of those companies.   But over time, the accountability of those companies to society, and the way that power is exercised over them has slipped for society to shareholders, and from shareholders to incumbent management.

We need to re-think the way that power is exercised over companies for the good of all affected by their activities. But before such ideas can evolve, some fundamental dilemmas have to be resolved.  We lack a coherent unifying theory of corporate governance.  The most widely used research tool, agency theory, is proving to be a straight jacket: useful in context but inevitably constraining. We need some new theoretical insights that will take us beyond agency theory or the perspectives of jurisprudence.

The corporate governance principles published by the Organisation for Economic Co-operation and Development (OECD) were designed to assist countries develop their own corporate governance codes.  They reflected what was considered best practice in the UK and USA.  This so-called Anglo-Saxon model of corporate governance required listed companies to have unitary boards, independent outside directors, and board committees.  The principles focused on enhancing shareholder value, and in the process richly rewarded top executives. In this model shareholders are widely dispersed, in markets that are liquid, with the discipline of hostile bids.

This so-called ‘Anglo-American approach’ to corporate governance, became the basis for governance codes around the world.  Indeed, in the United States it was widely assumed that the rest of the world would eventually converge with American corporate governance norms and reporting requirements, simply because it was thought the rest of the world needed access to American capital.

But a schism has emerged in the ‘Anglo-American approach’.  In the United States, Sarbanes Oxley mandated conformance with corporate governance by law.  Whilst in the United Kingdom and those other jurisdictions whose company law has been influenced over the years by UK common law, including Australia, Hong Kong, India, Singapore and South Africa, compliance is based on a voluntary ‘comply or explain’ philosophy.  Companies report compliance with the corporate governance code or explain why they have not.  This ‘rules versus principles’ dilemma seems to have been amplified by the ongoing global financial crisis.  It needs resolving.

But the Anglo-Saxon system is not the only governance model and some are questioning whether it is necessarily the best. Corporate governance is concerned with the way power is exercised over corporate entities.  In other parts of the world, alternative insider-relationship systems exercise power through corporate groups in chains, pyramids or power networks, by dominant families, or by states.  These markets are less likely to be liquid, the market for control poor, and the interests of employees, and other stakeholders more important.

In Japan, keiretsu organizational networks spread power around a group of inter-connected companies in ways that might provide insights for complex western groups.  The view that business involves relationships with all those involved – employees, customers, suppliers, and society, as well as shareholders, has only recently been recognized in the West under the umbrella of ‘corporate social responsibility’.

The governance of Chinese family businesses throughout East Asia can provide some valuable insights: for example, the emphasis on top-level leadership, the view that the independence of outside directors is less important than their character and business ability, and the way that the Chinese family business sees business more as a succession of trades rather than the building of empires.

In China, the link between state, at the national, provincial and local levels, and companies relies on a network of relationships, and policies can be pursued in the interests of the people, seen as the Party.

Of course there are problems with Asian approaches: corruption, insider trading, unfair treatment of minority shareholders, and domination by company leaders, to name a few.  But these are not uniquely eastern attributes as case-studies of US and UK company failures show.

These diverse models reflect more concentrated ownership, different cultures, and varied company law jurisdictions. But they also show different perceptions about the way power should be exercised over corporate entities. The eastern experience suggests that board leadership and board-level culture, in other words people and the way they behave, are more important than board structures and strictures, rules and regulations.  New theoretical perspectives will need to embrace such diversity.

Bob Tricker

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