A Discussion on the Importance of Global Approach to Regulating Corporate Governance
Recently, it is ever great emphasis on the corporate governance, especially the financial crisis happened in the early 2000 and 2008. A good corporate governance could lead the company develop in a sustainable way. While the bad corporate governance will cause a lot of problems, even the worst results is the large financial crisis happen in the world scope. The relative effectiveness of corporate governance has a profound effect on how well a business performs. Therefore, it is essential to figure out a global approach regarding regulating the corporate governance, especially for those multinational corporations, which business was conducted around the world.
Colley (2005) pointed out that as the capitalism created the business opportunities, the investors become the owners of portions or shares of business in which they invested with their excess money. The larger businesses that were created could not be governed effectively by partnership for many reasons. Therefore, the publicly owned company emerged as the dominant legal form for business enterprises.
Organization for Economic Cooperation and Development (OECD) defined the corporate governance is “the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders and spells out the rules and procedures for making decisions in corporate affairs. By doing so, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance.” Calder (2008) suggested that effective corporate governance is transparent, protects the rights of shareholders, includes both strategic and operational risk management, is as interested in long-term earning potential as it is in actual short-term earnings, holds directors accountable for their stewardships of business, and ensures that directors execute their responsibility. Davies (1997) pointed out that although shareholder appointed the directors of a company and all directors are legally obliged to act in the interest of shareholders, a great deal of latitude in the extent to which a board a board can involved in the running of a company.
A series of scandals happened in the United States exposed the series problems existing in the corporate governance. Berle and Means (1932) were the first to discover the structural and strategic implication of the separation of ownership and control because the distinguishing feature of a US or UK style public company is that it has a large number of small owners. Moreover, Jensen and Meckling (1976) found that the relationship between the stockholders and managers of a corporation fits the definition of a pure agency relationship. The separation of equity ownership of companies may cause the agency dilemmas proposed by Blair (1995). De Groot (2009) described that the separation of ownership of companies implies that investors of capital entrust the running of corporation to the directors and managers but cannot sure that directors and managers will always act in the investors best interests. Moreover, Hart (1995) stated that the small owners found costly to monitor the managers, and managers may overpay themselves and give themselves extravagant perks. Therefore, the American companies like the Enron, WorldCom, Adelphia and so on reflected the agency problem in the real practices by which the top management team pursue their own interest instead of the maximization of shareholder’s value. Calder (2008) also found that due to the fact that the company in US was led by single person who is the CEO, he or she may choose the board of directors who were likely to share the same values and objectives. Then the board of directors may lose their power to challenge the CEO because they share the same value and pursue the same goal.
According to the problems arising in the corporate governance, the UK approach adopted the self-regulatory and setting up a committee to deal with the specific issue. Calder (2008) summarized that the Cadbury report reviewed the structure and responsibilities of board of directors and summarized its recommendations in a Code of Best Practice, which was valid to all listed companies in UK; and review the roles of auditors, recommended the establishment of an audit commit consisting of at least three non-executives; and review the rights and responsibilities of shareholders. Clarke (2004) pointed out that the Sarbanes-Oxley Act published in US significantly changes the corporate governance and reporting requirements applicable to any company. Now the Sarbanes Oxley Act asked the US boards is with majority of independent directors to monitor and auditor the CEO, instituting wholly independent compensation and nominate committee and adopting specific responsibilities for those committee, performing regular board and committee evaluations, and publishing the governance guidelines. But Hansen (2004) argued whether legal compliance mechanism alone can show ways to business probity under Sarbanes-Oxley Act.
Therefore, there are substantial practical differences between corporate governance in different countries. As above mentioned the US and UK approach, Franks et al (1997) summarized that the German and French corporate governance system are perhaps best described an insider system- those in which the corporate governance sector had controlling interests in itself, and in which outside investors are not able to exert much control when participating in equity returns through the stock market. However, it is hard to say which approach is more effective. Whether there is a need to introduce a global approach to regulating the corporate governance? The below part will give out a detail analysis.
A discussionon the importance of global approach to regulating corporate governance
Aras and Crowther (2009) pointed out that the comparative analysis and the interest in global approach to corporate governance research can be justified by the unification, harmonization and internationalization process of the economic, legal, and social systems. The existing governance mechanism faces the challenges and questions even though their widely recognized strength did not prevent them from corporate scandals and efficiency failures. Rezaee (2011) found that although the corporate governance mechanisms vary throughout the world in response to each country’s economic, cultural, and legal circumstances, one emerging trend is toward a demand for the protection of global investors. As the global economy integration, many foreign companies face difference corporate governance mechanism when they conduct the global business. Therefore, technological advances, globalization, and cross-country investment required the regulators worldwide cooperate in reducing regular conflict and excessive regulatory reforms. Daniel (2004) concluded that the belief that corporate governance practices around the world will converge toward similar standards originated with classical economic growth theory. The convergence view of corporate governance pointed out that pressure from international investors and stakeholders, who would like to promote the transparent governance practices, are encouraging the expansion of the Anglo-American model. Moreover, the US and UK model demonstrated that the leadership of US and UK corporate governance model in developing and refining standards of corporate governance. In addition, the convergence of corporate governance is tending to highlight the role of global capital flows in eliminating inefficient forms of governance. Therefore, currently although there is a not total corporate governance convergence mechanism, the regulators in US, the SEC and International Organization of Securities Commission, and the World Federation of Exchange have yet to agree on a global regulatory framework on a global corporate governance structure in 2006. (Razaee, 2007) Furthermore, Baker and Anderson (2010) stated that the emerging global corporate governance rules are shaping capital market structure worldwide and informing competitiveness and the level of protection provided to investors. The increasing financial scandals call for the consistency and uniformity in corporate governance rules and guidelines. If such global corporate governance exists aligning the interest of directors, managers, and shareholders in achieving sustainable performance, which in turn promotes the market efficiency and economic prosperity. To sum up, the financial crisis happened in 2000s indicated the importance to adopt the global approach regarding the corporate governance. On the one hand, the global integration of economy makes the investors doing their investment on the international basis. The different countries adopted the different corporate governance mechanisms decrease the efficiency of the capital market and the efficiency of the governance. The global approach may uniform the regulation and make it more efficient. Moreover, the global approach will decrease the compliance cost for multinational companies listed in different countries. The one approach reduces the compliance cost when they plan to list in other countries which was supposed to comply with different corporate governance with high cost. On the other hand, the financial crisis revealed the gap between the corporate governance and the real case, because the agency problems may push the top managers behave not in accordance with the shareholder’s value. Through a global approach, the multinational companies could govern their management team in a more efficient way around the world. In other worlds, the global corporate governance will make the multinational companies govern the performance of management team more easily and efficient. The single global corporate governance will benefit the multinational companies saving the administrative cost. Therefore, ideally the economic integration and financial crisis promote a global approach, which to some extent will benefit the multinational companies such as decreasing the administrative cost. The multinational companies could easily manage its subsidiaries more easily and efficient in the singe legal framework, corporate ownership, culture and capital market.
As above mentioned, the current leading corporate cultures are US and UK approaches. The former is rule-based approach called Anglo-Saxon model, which is focusing on promoting flexibility and shareholder value. The latter one is principal-based approach, which is promoting stability and long-term perspectives. Rezaee (2007) argued that UK approach is very broad and comprehensive without specifying specific rules in terms of the number of independent nonexecutive directors and their term limits, but they are steps in right direction in improving corporate governance and accountability and reinforcing investors’ rights. Thus, if other countries adopt the principal-base approach, the global corporate governance may be feasible. Especially, the financial scandal revealed the inefficiency of the US approach about corporate governance, while the UK approach put great emphasis on the independent directors to govern and lead the company developing in a sustainable way. But it is hard to say which approach is better. Due to the fact that both UK and US have scandals happen in the 1990s and 2000s, actually it lacks of a common approach or the best practice around the world to lead the corporate governance.
However, the promotion of a global approach about the corporate governance faces a lot of challenges. As above mentioned, different countries had their own legal framework, accounting rules, ownership structure, and capital market. According to Coffee(2005), the realization of global corporate governance is influenced by many factors: Corporate ownership and control, capital market, culture, and the legal system. The corporate ownership in each country varies a lot. The different capital market structure set the different requirement. The culture difference makes the operation conducting fit into its own place. Especially, the legal framework played an important role in the determination of corporate governance. If a multinational company adopts single corporate governance, it may experience the difficulties. For example, for Japanese multinational companies, if they listed in US stock market and UK stock market, they have to fulfill the US approach and UK approach. But it will face many problems. The different legal framework and corporate governance in the home country conflicts the legal framework in US. The Japanese companies always feature the centralized ownership different from the US and UK’s ownership structure. The UK approach may require the board has independent director to govern the CEO’s performance. Meanwhile, the US approach required most of the directors are the independent directors. But in the home country, the board is mainly composed of the directors belong to the firm. Thus, the conflicts exist between the corporate governance approaches. If the Japanese multinational adopted the single approach such as the US approach, it means in the home country, it has to give up the previous ownership structure and the traditional cultures. Sometimes, the independent directors have not sufficient knowledge to govern the top managers’ operation. Therefore, it is hard to say the US approach is the good one. And the Japanese multinational companies may have to give up its traditional and successful ownership structure so as to adopt a global approach. Then the Japanese multinational companies will meet the problems.
Another example is the capital market. In the US market, it requires the company disclose the report on the quarterly basis. For the Japanese multinational companies in home country, it only required the annually disclosure. Then the subsidiary in US has to prepare the quarterly report to meet the requirements. If the Japanese multinational companies adopted the US approach, it has to prepare the quarterly report in each subsidiary, which will make its operation inefficient to comply with the single corporate governance approach. It will also contradict with companies’ strategy to put much effort on the report preparation.
The different approaches perform on behalf different users. The US style corporate governance pays more attention on the shareholder’s value. While the Japanese style corporate governance focuses on the stakeholder’s value. For the Japanese multinational companies, it will be risky to adopt the single corporate governance. Because, maximizing the value of shareholders may push the managers to pursue the short-term goal or financial performance instead of development in a sustainable way. Thus, for Japanese multinational companies applying the single approach, its strategy will shift from the long-term to the short-term. For the Japanese multinational companies would like to pursue the long-term sustainable development, the change of the corporate governance will create the new problems. The interest of stakeholder then could not guarantee at a total corporate governance approach. This in turn, the corporate strategy will be unknown in the future. Therefore, the multinational companies will face the conflicts between the shareholder’s value and the stakeholder’s value if they decide to adopt one global approach. Each country has its own culture. Since the benefit of one global approach is hard to measure, the cost of one global approach is huge if such approach failure. Though the global economic integration suggested a global approach, it is also very risky to apply at the multinational companies. Moreover, a global approach may lack of the flexibility when the multinational companies set the corporate governance. Thus, the efficiency of a global approach is hard to evaluate.
Although it is obvious to see the importance of a global corporate governance mechanism, it is hard to trade off the disadvantage associated such a approach. For the multinational company operate on a global basis, it has to fulfill its corporate governance at the home country, and it also has to meet the requirements at the host countries. Due to the different ownership structure, culture and legal framework, the multinational companies will meet the problems if they adopt a global approach. For one thing, it is hard to say which approach is more feasible around the world. One approach may work out at its own country does not mean it will work out in other countries. For another thing, the multinational companies will meet problems when they decide to adopt a global approach. Even worse, a global approach will result in the disaster in other countries. Moreover, Boscheck (2008) pointed out that OECD as a pioneer encouraging the global corporate governance, typically focuses on constraining board discretion largely to the benefits of shareholders and auditors, increasing director’s reputations and liability risk, or reinforcing board independence. But such initiatives could not prevent the minority investors under threat in Europe’s blockholder-dominated corporation. As above mentioned, one-fit-to-all methods may increase the administrative efficiency, but it will take huge cost if the multinational company takes the wrong decisions. Therefore, a global approach may take as a risky approach applied in the real world.
Corporate governance is an efficient tool to monitor and evaluate the performance of the directors in the company. An efficient corporate governance mechanism will ensure a long-term sustainable development for a multinational company as well as protect the interest of the shareholders. But recently, the financial crisis and corporate scandals such as Enron revealed the problems existing in the current corporate governance system. Moreover, the global economy integration calls for a global approach for multinational companies that could effectively govern its operations. On the one hand, a global approach to some extent will increase the administrative efficiency when the multinational companies operate in the different countries. It will also reduce the administrative cost because the subsidiaries adopt the same method. On the other hand, a global approach is difficult to realize. Currently, it is hard to say which approach is superior to another even though US and UK approach are the leading approaches in the world. Moreover, different countries have their own legal framework, culture, capital market, and corporate ownership structure. The multinational companies will face potential problems if they adopt one total global approach. For example, the change of corporate ownership in the Japanese multinational companies will lead to the corporate strategy changing from long-term perspective to the short-term perspective. Such change will be very risky. Although it is important to have a global corporate governance mechanism, there is no best practice around world at current time. If the conflicts could be eliminated between the different countries, then a global approach may be feasible in the future.
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