Convergence of Corporate Governance

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Convergence of Corporate Governance
Introduction
•
Three kinds of pressures for convergence:
- Mimetic.
- Normative.
- Coercive.
•
Each of these three types of pressures is at play in the case of governance
convergence.

Mimetic
-
When companies from one country begin to follow what they perceive to be the
best governance practices from another country.

For improving the company’s legitimacy in the eyes of stakeholders.
Normative
-
International harmonization of disclosure and accounting standards promoting
convergence.

Coercive
-
When a company from one country accesses capital markets of another country.
-
Required to conform to the regulatory requirements of that market.
Capital market integration
•
Companies from one country can easily list their stock in exchanges in other
countries.
•
Cross-border M&A at an all time high and face far less regulatory barriers today.
•
Substantial growth in foreign portfolio investments as investors seek both
diversification and high returns.
•
Venture Capital (VC) financing have also become truly global.
•
Significant implications for convergence due to the above activities.
•
Huge increase in cross-listing around the world.
•
When companies decide to list in a foreign market with higher disclosure standards,
they engage in a bonding mechanism signaling to investors that they would comply
with higher standards than required in their home country.
•
When a company from one country acquires a company from another country, the
new entity will exhibit the governance characteristics of both countries.
Diffusion of CG codes and harmonization of accounting rules
•
Publication of CG codes in the UK since the early 1990s was followed by similar
development in other countries.
•
Once these codes are published, they become important source of normative
institutional pressure which leads to convergence.
•
If codes are similar across countries, they lead to global convergence.
•
Both firms and investors find different accounting standards a major problem
hindering integration of capital markets.
•
A response to the preceding problem is to develop international accounting
standards by IASC.
•
Harmonization of accounting standards facilitate convergence through mandating
uniform disclosure requirements.
•
Compliance to the Sarbanes Oxley Act has been a source of convergence amongst
companies.
Impediments to convergence
•
Path dependence.
•
Complementarities.
•
Resistance by interest groups.
•
Economic nationalism and differences in social norms.

Path dependence
•
Current state of a system is the result of its initial conditions as well as the path it
took.
•
Governance system of a country is determined by historical events and policy
responses.
•
This results both in persistence of existing systems and divergence across systems.

Complementarities
•
Prevailing governance practices of a country are the result of a system of
complementary institutions, legal rules and practices.
•
Any attempt to improve or change one element independently may hurt the
efficiency of the whole system.
•
Effectiveness of individual governance practices cannot be evaluated in isolation.
•
High dividends may be beneficial to shareholders in the US context but not
necessarily in Japan or Korea.

Resistance by interest groups
•
Changes or reform can potentially reduce control by interest groups or vested
interests.
•
For example unequal voting rights prevail in many European countries (designed
to protect family control).
•
Any effort to dilute the control rights of these groups would face strong resistance.
•
Regulatory inertia will continue to perpetuate the current system unless groups can
garner enough support to amend existing rules.

Economic nationalism and differences in social norms
•
Enthusiasm of globalization is not shared by everyone.
•
One response to globalization has been strong and aggressive assertions of
national differences and identity.
•
Foreign investors proposing corporate governance reforms could result in a
backlash against foreigners.
•
Social and commercial norms prevailing in a country can be obstacles in the path
of convergence.
•
Societies differ in terms of socially accepted objectives for business organizations.
•
Initiatives to harmonize regulations at EU level have encountered fierce resistance
due to differences in national norms.
•
Co-existence of both forces for convergence and forces against them in many
countries.
Multinational corporations and convergence
•
MNCs viewed as key manifestation of economic globalization and are perhaps the
most important agents of convergence.
•
Convergence comes about through a two-step process:
- First step is practice transfer between the parent and subsidiaries.
- Second step is practice spillovers in the local host country context.
•
MNCs contribute to convergence of corp. governance by transfer of knowledge
through the corporate network and by spillover to local contexts and corp.
governance systems.
Practice transfer between parent and subsidiaries
•
Specific advantage of MNCs relative to markets rests on their subsidiaries
exposure to many different contexts, which enhance the exploration of new
knowledge and the creation of valuable capabilities that can be diffused throughout
corporate network.
•
MNCs have incentive to diffuse established practices through corporate network.
•
Local companies are likely to mimic successful MNCs and adopt similar
organizational practices.
•
Presence of MNCs in local contexts contribute to convergence.
Fostering convergence by CG codes
•
Anglo Saxon practices are the dominant source of diffusion.
•
Non-binding codes develop more easily in different countries.
•
Implemented throughout EU and more than 60 countries elsewhere.
•
But resistance rising due to anti-globalization forces in recent years.
•
If CG codes so effective how come UK was so badly hit by the GFC?
Conclusion
•
Still too early to have an answer to the question of whether CG systems around
the world are converging or not.
•
Institutional and regulatory changes are slow, evolve over time and are the results
of complex processes.
•
Changes often characterized by interruptions and detours.
•
Major theme emerging from the review of governance changes in several different
countries seems to be that it is no longer productive to approach using a
convergence/divergence dichotomy.
•
Most countries are unwilling to abandon their existing system and replace it with
the US/UK model.
•
Selective adoption of certain practices by careful adaptation and tailoring to suit
local needs.
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