Models of Corporate Governance CCL 2012 Henrik Norinder

Models of Corp Governance

Consider how context and culture affect corporate governance - American rule-based model - United Kingdom/Commonwealth principles-based model - Continental European two-tier model - Japanese business network model - Asian family based model - corporate governance: convergence or differentiation?

- institutions necessary for successful corporate governance

Context and culture affect corporate governance

Differences in ownership patterns – highly dispersed with no dominant owner – concentrated with single or block holders dominant Markets for corporate control Culture influences on corporate governance

Markets for corporate control In finance markets that are large, liquid, and with high turnover listed companies face – chances of hostile take-over bids – consequential loss of board control – widespread merger and acquisition activity In finance markets that are small, illiquid with low turnover, the market for corporate control will be weaker, and merger and acquisition activity infrequent

Five broad systems of corporate governance: – the American rule-based mode – the United Kingdom/Commonwealth principles based model – the Continental European two-tier model, – the Japanese stakeholder-orientated network model – the Asian family-based model

The American rule-based model – companies incorporated by states – – – Investor protection federal by SEC company law based on common law governance regulated by law and mandatory rules, which are inherently inflexible – – high levels of litigation generally accepted accounting principles rule based – unitary boards with executive and non-executive directors – roles of board chairman and CEO often combined

The UK/Commonwealth principles-based model – – companies incorporated at country level company law based on common law – – governance principles-based corporate governance codes - follow or explain why not – international accounting standards – unitary boards with executive and non-executive directors – roles of board chairman and CEO separated

The Continental European two-tier model – – companies incorporated at country level company law based on rule-based civil law – – governance rooted in the law international accounting standards – – supervisory board - all non-executive executive board - all executive – – no common membership between the two boards co-determination with employee and shareholder appointed directors on supervisory board

The Japanese business network model – Keiretsu networks of companies connected through cross-holdings, interlocking directorships and extensive inter-trading – classical model of the keiretsu reflects the social cohesion within Japanese society • • unity throughout the organization non-adversarial relationships • • • • lifetime employment enterprise unions personnel policies encouraging commitment decision-making by consensus • promotion based on loyalty and social compatibility as well as performance This model is currently under pressure to change but survives

The Japanese business network model – boards of directors tend to be large – all executive - the top layers of the management pyramid – – 'promotion to the board‘ independent outside directors not acceptable • how can they understand the company?

• • how can they appreciate the corporate culture?

potential to disrupt the harmony – – Meetings of the whole board formal, ceremonial governance power lies with chairman and senior directors/executives

The Asian family-based model Overseas Chinese firms are: – family centric with close family control – – controlled through an equity stake kept within the family entrepreneurial often with a dominant entrepreneur – – – decision making centralised close personal links emphasizing trust and control paternalistic in management style – – social fabric dependent on relationships and social harmony, strategically intuitive with business seen as more of a succession of contracts or ventures, rather than strategic plans, brand-creation or quantitative analysis

Corporate governance – convergence or differentiation?

Forces for convergence – CG codes of good practice around the world – securities regulators – – international accounting standards global concentration of audit practices – – globalization of companies raising capital on overseas exchanges – international institutional investors – – private equity funding cross-border merger of stock exchanges – research publications, conferences and professional journals

Corporate governance – convergence or differentiation?

Forces for differentiation – legal differences in company law, contract law and bankruptcy law – different standards in legal processes – stock market differences – capitalization, liquidity – differences in the market for control – differences in ownership structures – historical differences and expectations – cultural differences

• • • • Institutions necessary for successful CG a reliable legal system with an independent judiciary courts that are bias and corruption free judgements that are enforceable, free of political pressures a stock market with liquidity, international standing financial institutions, regulatory authorities including securities and futures market regulators

• • • • • • • a companies registry that facilitates comprehensive disclosure accounting and legal professions that are internationally respected auditing firms that are professional, reliable, and independent of their clients professional organizations educational institutions with relevant qualifications consulting organizations able to advise companies and directors financial and corporate governance training corporate governance research reported in sound journals

We have considered: - how context and culture affect corporate governance - American rule-based model - United Kingdom/Commonwealth principles-based model - Continental European two-tier model - Japanese business network model - Asian family based model - corporate governance: convergence or differentiation?

- institutions necessary for successful corporate governance