CGVE/U1 Topic 5 Corporate Governance System Worldwide
Our language, beliefs, cultures, tastes, attitudes and politics have developed over centuries and are what make each of our nations unique. Unsurprisingly, our business practices have evolved in an equally as diverse pattern and, despite the increasing globalisation of our biggest businesses, governance rules now also vary considerably between countries.
All global governance rules aim to protect shareholders and stakeholders while ensuring the prosperity of the business, but not all follow the same model and can lead to very different structures, spheres of influence and succession plans.
In this blog I look at the different governance structures around the world, consider the ongoing reforms and ask if one global governance standard would be a benefit or hindrance to international organisations?
What governance models are there around the globe?
Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
While all systems have the same objective and have origins in similar legal frameworks, the framework, rights and make-up of governance structures can vary considerably.
For example, in the US, shareholders elect a board of directors, who in turn hire and fire the managers who actually run the company. In Germany, the board is not legally charged with representing the interests of shareholders, but is rather charged with representing the interests of stakeholders, including workers and creditors as well as the shareholders. It also usually has a member of the labour union on the board.
In the UK, the majority of public companies voluntarily abide by the Code of Best Practice on corporate governance. It recommends there should be at least three outside directors and the board chairman and the CEO should be different individuals.
Japan’s corporate boards are dominated with insiders – loyal managers who cap off their careers with a stint inside the boardroom – and they are primarily concerned with the welfare of keiretsu (parent company) to which the company belongs.
China has colossal corporate structures where businesses have parent, grandparent and even great-grandparent companies. Each level has a board and Communist Party officials usually have a seat. In India, the founding family members usually hold sway over the board.
Korean manufacturers’ strategy is to grow as rapidly as possible and do this by borrowing money from banks. As a result, the government holds sway over their corporate governance structure through the banks. This relationship gives the Government influence over the company, while the company has a say in government issues and Korean corporate governance.
Finally, the French corporate governance structure often attracts criticism for involving a complex network of public sector organisations, large businesses and banks. However, this ensures the French excel at collaborative projects between business and Government. For example, France leads the world in the production of nuclear reactors and high-speed trains.
An international corporate governance standard?
But, is this diverse array of corporate governance structures a good or bad thing for business?
The Wharton School’s Mauro Guillen has studied global differences and says in his paper ‘Corporate Governance and Globalization: Is There Convergence Across Countries?’: “There’s a very important connection between corporate governance and the competitive strategy of firms. It’s not as simple as saying, ‘Oh, we’re going to change corporate governance so that we all have the same rules.’ The system of corporate governance interacts with many other things in an economy, such as the way labor laws are regulated, tax laws and bankruptcy legislation. If you change one component without changing the others, you’re essentially causing trouble.”
Despite major scandals like Enron, the general assumption is that international investors want a global standard to protect their shareholdings and many organisations are moving towards the US shareholder-centred model.
Jay Lorsch, professor of human relations at the Harvard Business School, agrees that corporate boards are converging towards a common model and says that new regulations like the Sarbanes-Oxley Act in the US that affect companies seeking capital investment by trading shares are forcing a global convergence. He adds: “It’s particularly strong among the industrialized nations of Europe and the United States.”
Charles Elson, director of the John L Weinberg Center for Corporate Governance at the University of Delaware, refers to the International Corporate Governance Network (ICGN), whose members control $10 trillion in assets and says: “They are large pension funds in the world and they have a common interest in creating boards that are independent of management and that act as an appropriate monitor of investor interaction. That’s the model we’re moving to. No matter where you happen to be, that model produces the best potential returns.”
According to the ICGN Statement on Global Corporate Governance Principles regarding corporate boards: “Independent non-executives should comprise no fewer than three members and as much as a substantial majority. Audit, remuneration and nomination board committees should be composed wholly or predominantly of independent non-executives.”
Wharton management professor Michael Useem predicts boards around the world will move to a standard model within 15 years, driven by globalisation and the need to move huge sums of investment freely between countries.
He argues: “Put yourself in the shoes of Fidelity or Vanguard or other investors out there who are diversifying out of US stocks. You want to assure yourself that the companies you are going into are reasonably well governed — that they have acceptable accounting standards and are transparent.”
He says the central focus of corporate governance is the structure of the corporate board and that firms around the world are moving to create boards that are more independent from management, populated by non-executive members and organised around committees overseeing management, compensation and auditing. He adds: “All these factors point to good governance and thus the company becomes more attractive to investors and legitimate in the eyes of suppliers and customers. An investment manager anywhere in the world looking to put cash in the stock of a company in Lithuania or Italy will come at the company with an eye to whether it is following good practices.”
Diversity in corporate governance
Despite the globalisation of business and investor desire for solid governance, Guillen’s research contradicts the generally-held assumption that governance rules will converge. His study shows foreign investment has fallen in Anglo-Saxon nations, while investment in other nations’ models has risen the equivalent amount in the time period.
“Corporate managers should not assume the world, from the point of view of corporate governance, is becoming one big place,” says Guillen. “If your company is expanding throughout the world, you still need to take into account those differences. You can’t ignore them thinking that they will be going away. Such an approach is bound to fail.”
Despite the debate around the need for a global governance standard, one thing is clear. Governance is critical to not only the success of a company, but can also have far wider implications for the economy of a nation.
Research from the Organisation for Economic Co-operation and Development on Corporate Governance: Effects on Firm Performance and Economic Growth says: “There is no single model of good corporate governance, and both insider and outsider systems have their strengths, weaknesses, and different economic implications. However, corporate governance affects the development and functioning of capital markets and exerts a strong influence on resource allocation.
“In an era of increasing capital mobility and globalisation, it has also become an important framework condition affecting the industrial competitiveness and economies of member countries. On balance, therefore, the empirical evidence is supportive of the hypothesis that large shareholders are active monitors in companies, and that direct shareholder monitoring helps boost the overall profitability of firms.”