Governing Globally: Convergence, Differentiation, or Bridging By: Marc J. Epstein Rice University © Marc J. Epstein - Corporate Governance - Nice 2011

Governing Globally: Governing Globally: Convergence, Differentiation, Convergence, Differentiation,

or Bridgingor Bridging

By: Marc J. EpsteinBy: Marc J. EpsteinRice UniversityRice University

© Marc J. Epstein - Corporate Governance - Nice 2011 1


Corporate Governance: ControversyCorporate 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)

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



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.


BackgroundBackground

Corporate governance issues have become more visible and critical – globally:

- scholarly research

- regulation to improve performance

- corporate practice

.


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.


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.

The ModelThe Model


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.

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?


Board Roles and Responsibilities Board Roles and Responsibilities

Director’s nomination and training

Financial issues

Corporate behavior

Governance issues

Strategy implementation

Strategy monitoring

Selection and compensation

Performance evaluationBoard roles

and responsibilities

Accountability

Senior level staffing and evaluation

Strategic oversight

Strategy formulation


Corporate Board Performance ModelCorporate Board Performance Model

Board Performance

Corporate Performance

Board Systems and Structure

• Independence• Diligence• Competence• Ethics

• Board and committee structure• 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

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Board Composition

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The model and its elements are surprisingly applicable globally

But, 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.

Global Applicability of the ModelGlobal Applicability of the Model


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

Current ResearchCurrent Research


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


Three Systems of Corporate Governance (articulated by Choi et al (1999) and others):

- Anglo American

- Communitarian

- Emerging Markets

Governing GloballyGoverning Globally


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

• Financing by capital markets prevails

• Financial markets influence corporate governance practices

• Unitary board structure

• Primarily composed of non-executive directors (and independent directors)

• Stakeholder-centric

• Banks and suppliers own significant equity in a company

• Legislation mandates governance standards

• Two-tier board structure (supervisory & management )

• Labor, founding family, and bank are common members - interlocking common

• Stakeholder-centric

• State participation in corporate ownership

• Government regulates equity markets

• Board structure varies

• Large corporate shareholders, such as the state, families, or conglomerates dominate

General Characteristics of Global Corporate General Characteristics of Global Corporate Governance SystemsGovernance Systems


External- Markets- Legal Systems- Ownership and Control Structures

Internal- Board Composition- Board Systems- Board Structure- Executive Compensation

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 SYSTEMS

• 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 & CONTROL STRUCTURES

• 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


External Determinants of External Determinants of Corporate Governance PerformanceCorporate Governance Performance

CORP. GOVERNANCE MECHANISM ANGLO-AMERICAN COMMUNITARIAN EMERGING MARKETS

BOARD COMPOSITION, SYSTEMS, & STRUCTURE

• 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

Internal Determinants of Internal Determinants of Corporate Governance PerformanceCorporate Governance Performance



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


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

Future ResearchFuture Research


This is required for both the application in practice and the foundation for governance research.

This leads to unanswered research questions such as:


-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?

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.


SummarySummary


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.

Documents

Governing Globally: Convergence, Differentiation, or Bridging By: Marc J. Epstein Rice University © Marc J. Epstein - Corporate Governance - Nice 2011