Transcript Governing Globally: Convergence, Differentiation, or Bridging By: Marc J. Epstein Rice University © Marc J.

Governing Globally:
Convergence, Differentiation,
or Bridging
By: Marc J. Epstein
Rice University
© Marc J. Epstein - Corporate Governance - Nice 2011
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Corporate Governance: Controversy
Some have suggested that countries will
(and should) move toward convergence of
global governance practices
Some disagree -
- often in law (form)
- and in practice and implementation
(function)
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Two Questions:
Q1) Should (or will) corporations move toward
- convergence
- differentiation, or
- bridging based on common principles of
good governance?
A1) Not convergence, but understanding
differences. Using different lenses in
evaluating corporate and board
performance
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Q2) Which system is best?
A2) Not much research, classification, or
analysis to answer this question. This
presentation tries to frame that
discussion.
This has major implications for
corporate practice and creates critical
need for more academic research.
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Background
Corporate governance issues have become
more visible and critical – globally:
- scholarly research
- regulation to improve performance
- corporate practice
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Many examples of failures:
- Satyam
- Parmalat
- Enron
Some failures caused by fraud
Some failures caused by poor oversight
Significant differences in global views
(academic and managerial) of problems,
causes, results, and solutions.
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The Model
In 2002, developed a set of principles and a
model (Corporate Board Performance
Model) including inputs, processes,
outputs, and outcomes necessary for
superior board and corporate performance.
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The principles do apply:
(a) globally,
(b)For profits / non profits,
(c) Large and small, and
(d)Publicly / privately controlled
But, how the principles are applied globally
varies significantly. And, the evaluation of
success must differ significantly.
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The model addresses management control and
performance measurement.
What are the actions that managers, directors,
investors, and other stakeholders can take to
ensure superior board performance (and
corporate performance)?
What are the appropriate measures of success –
both internally and externally?
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Board Roles and Responsibilities
Financial issues
Accountability
Corporate behavior
Governance issues
Performance evaluation
Board roles
and
responsibilities
Senior level
staffing and
evaluation
Selection and compensation
Director’s nomination and training
Strategy formulation
Strategic
oversight
Strategy implementation
Strategy monitoring
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Corporate Board Performance Model
•
•
•
•
•
Feedback
Board Systems
and Structure
Board
Performance
Corporate
Performance
Productive meetings
Succession planning system
Financial reporting & communication/risk mgmt.
Strategic information system/information availability
Performance evaluation / compensation systems
• Superior strategic guidance and oversight
• Accountable organization
• High quality senior executives
▪ Long term financial success
© Marc J. Epstein - Corporate Governance - Nice 2011
OUTPUTS
• Board and committee structure
PROCESSES
INPUTS
Independence
Diligence
Competence
Ethics
OUTCOMES
Board
Composition
•
•
•
•
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Global Applicability of the Model
The model and its elements are surprisingly
applicable globally
But, its implementation will differ globally
This will significantly impact:
- the inputs and processes needed to
achieve the desired outcomes, and
- the evaluation of success of both board
and corporate performance
since country differences are substantial.
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Current Research
So - examined the extensive prior literature on
corporate governance throughout the world
Paucity of cross country analyses
Developed a classification of three primary
global corporate governance systems and key
differences in practice
Highlights primary similarities and
differences
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Based heavily on historical and cultural
factors – and impact on management control
and performance measurement
Gives context to question of “which system
is best?”
Examines differentiation vs. convergence vs.
bridging
Provides significant foundation and important
questions for future research
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Governing Globally
Three Systems of Corporate Governance
(articulated by Choi et al (1999) and others):
- Anglo American
- Communitarian
- Emerging Markets
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General Characteristics of Global Corporate
Governance Systems
ANGLO-AMERICAN
COMMUNITARIAN
EMERGING MARKETS
EXAMPLES OF
COUNRIES
United States, United
Kingdom, Australia,
Canada, South Africa
Japan, Germany, Belgium,
Scandinavia
China, Eastern Europe, Brazil,
Mexico, Russia
GENERAL
CHARACTERISTICS
• Shareholder-primacy
• Stakeholder-centric
• Stakeholder-centric
• Financing by capital
markets prevails
• Banks and suppliers own
significant equity in a
company
• State participation in
corporate ownership
• Financial markets
influence corporate
governance practices
• Legislation mandates
governance standards
• Government regulates equity
markets
• Unitary board
structure
• Two-tier board structure
(supervisory &
management )
• Board structure varies
• Primarily composed of
non-executive directors
(and independent
directors)
• Labor, founding family, and
bank are common members
- interlocking common
• Large corporate shareholders,
such as the state, families, or
conglomerates dominate
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Determinants of
Corporate Governance Performance
External
- Markets
- Legal Systems
- Ownership and Control Structures
Internal
- Board Composition
- Board Systems
- Board Structure
- Executive Compensation
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External Determinants of
Corporate Governance Performance
CORP. GOVERNANCE
MECHANISM
ANGLO-AMERICAN
COMMUNITARIAN
EMERGING MARKETS
MARKETS
• Financial Markets
• Strong and deep
• Weak and thin
• Dynamic and volatile
• Investment purpose
• Short-term return
• Long-term return
• Policy and Political goals
• Methods of finance
• Financial markets
• Bank credit and retained
earnings
• Private and state-owned
banks
• Legal history
• Common law system
• Civil law system
• Combined systems that
are still rapidly evolving
• Transactional methods
• Contracts
• Relationship-based
transactions
• Relationship-based
transactions
• Ownership structure
• Diverse individual and
institutional ownership
• Concentrated family and
corporate ownership
• Concentrated family,
corporate, and gov’t
ownership
•
Minority shareholder
protections
• Strong
• Weak
• Non-existent
•
Dominant control
mechanisms
• Voting and board
representation
• Cross-holding, pyramidal
groups, lending
relationships
• Internal and external
mechanisms
LEGAL SYSTEMS
OWNERSHIP &
CONTROL STRUCTURES
© Marc J. Epstein - Corporate Governance - Nice 2011
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Internal Determinants of
Corporate Governance Performance
CORP. GOVERNANCE
MECHANISM
ANGLO-AMERICAN
COMMUNITARIAN
EMERGING MARKETS
• Board composition
• Basic requirements for
independent directors
• Strong requirements
for both inside and
independent directors
• Nominal requirements
for independent
directors
• Board evaluation
• No requirements for
board evaluation
• Strong requirements
for board evaluation
• Nominal requirements
for board evaluation
• Board structure
• Single-tier
• Two tier
• Two tier
• Board accountability
• Shareholders
• Stakeholders
(including entire value
chain and employees)
• Stakeholders and
government
• Executive Compensation
• Large performance
pay
• Less performance
pay
• Little performance
pay
BOARD COMPOSITION,
SYSTEMS, & STRUCTURE
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So, which system is best?
- Contingent on objectives, systems, countries
- Need to evaluate accordingly
- Principles and performance measures need
more clarity
- System differences need more clarity
- More research is needed
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Future Research
These three corporate governance systems are
based on significantly different historical,
legal, and cultural contexts
To understand the applicability of corporate
governance research in a global context, a
clearer understanding of the similarities and
differences of the management control
mechanisms and measures of board and
corporate success is necessary
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This is required for both the application in
practice and the foundation for governance
research.
This leads to unanswered research
questions such as:
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- Which system (and/or mechanisms) leads
to higher levels of performance?
- Is higher level of performance of systems
or mechanisms contingent on certain
elements or conditions?
- Recognizing some differences in
objectives, how should success (of both
processes and outcomes) be measured and
for whom?
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Summary
Corporations, capital markets and corporate
governance are becoming more global.
This is likely to be more about bridging
theory and practice rather than either
differentiation or convergence.
The global applicability of the model has
been striking.
But, it is how to work with multiple
systems where corporations and
stakeholders have different objectives in
different countries.
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In research there is a need to evaluate
governance based on the differentiation and
accommodation of the various systems in
the research design.
Which is better? When? For whom? For
what purpose? What are benefits and
limitations of each?
There is a significant need for further
research on the implementation of the
model, and the relevant management
control and performance measurement
mechanisms.
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