Thesis: International Developments in Corporate Governance

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International Developments in Corporate Governance

The proper governance of companies will become as crucial to the world economy as the proper governing of countries... strong corporate governance produces good social progress. The two go together. -- James Wolfensohn, President of the World Bank, 2002

The epigraph above is a reflection of the increased amount of attention being directed at corporate governance and the part it plays in promoting international trade and stakeholder confidence. In a day and age characterized by high-profile corporate bailouts in the United States and a shaky global economy, identifying opportunities to improve investor confidence and corporate governance represent timely and valuable enterprises. Today, in Anglo-American contexts, the term "corporate governance" is typically used to describe the means by which a firm's shareholders and lenders control the decisions of a company's senior leadership team. While this definition is expanded to also include affected stakeholders when it is used some other countries, the trend is clear and an increasing number of analysts are suggesting that more transparent and effective corporate governance techniques are needed to reassure investors of the viability of an enterprise and to ensure that an organization's resources are used to their best effect. This study provides an overview and background of corporate governance, followed by a review of the relevant peer-reviewed and scholarly literature concerning international developments in corporate governance and constraints to international convergence in this area. A summary of the research and important findings are presented in the conclusion.

Review and Discussion

Background and Overview.

The term "corporate governance" is being increasingly bandied about in the media in different ways and the casual observer may be left wondering what the term means at all. In this regard, Shu-Acquaye (2007) advises that, "While the exact definition of corporate governance should be specifically tailored to the requirements of each jurisdiction in which it is maintained, one concept utilized by both the United States and Europe is consistent: Corporate governance relates to some form of company 'control.'" This general definition is congruent with a study by Buck and Shahrim (2005), where the authors note that, "Corporate governance and governance institutions in general terms are concerned with the means by which a firm's stakeholders control the decisions of senior managers. These stakeholders can include shareholders, executive directors, employees who are not executives, customers, creditors, suppliers (including banks as suppliers of credit), competitors, and the State."

While the term "corporate governance," then, connotes some form of company "control," the source and respective impact of the sources of such controls may differ in fundamental ways from country to country. From the broadest perspective, corporate governance functions differently in two fundamentally discrete environments:

In an Anglo-American context, the governance definition is narrower, and is usually restricted to shareholders, that is, the means by which a firm's outside investors (mainly shareholders, but also lenders) try to ensure that they are not exploited by opportunistic senior managers within the firm.

Beyond the Anglo-American context, corporate governance usually refers to the means by which any of the firm's stakeholders (not just investors) may control managers' decisions. This is what is referred to as welfare capitalism, where executives are influenced mainly not by stock prices and shareholders but by the voice of other stakeholders who are highly committed to the firm and are prepared to contribute formally to its governance.

In many ways, corporate governance practices are directly related to a firm's business systems and the definitions for these terms are likewise related According to Pedersen and Thomsen, business systems "are particular ways of organizing, controlling and directing enterprises or particular arrangements of hierarchy-market relations which become institutionalized and relatively successful in particular contexts, which is almost exactly equivalent to some of the broader definitions of corporate governance." Taken together, business systems and corporate governance practices can be viewed in the same light, particularly as they regard the important differences that exist among the members of the international community in terms of the relative importance of government regulation and oversight, as well as what role the corporate world is supposed to play in contributing back to the larger society in which it competes. In this regard, Pedersen and Thomsen also note that such "distinctive ways of organizing economic activities become established and effective because of major differences in key social institutions, such as the state, the financial system and the education and training system, including labor-market organization as well as the indirect influence of more general and diffuse attitudes and beliefs about work, material values and authority relations, family and kinship relations, identities and authority structures." This author suggests that the following differences exist in corporate governance practices, like their corresponding business systems:

Business systems consist of differences in [f]irst, the nature of the firm;

The connections that firms develop with each other;

How activities and skills are coordinated within firms;

Although business systems often coincide with national economies, it is recognized that [a]s well as distinct systems within nation states, there are of course substantial differences between firm structures and connections across industries.

Furthermore, nation-states need not have equally homogeneous business systems. It is stressed that [i]n societies where major social institutions are highly differentiated and have been established for some time since industrialization took place - such as Britain and the U.S.A. - business systems are not as internally homogenous and mutually distinct as those in recently industrialized societies which are less institutionally pluralistic.

The more homogeneous, less pluralistic systems develop particularly distinctive managerial rationalities and practices. The social institutions that emerge from this process do not obstruct the market mechanism, but provide institutional foundations for efficiency, being key phenomena in the constitution of different competitive orders and should not be counterposed to market efficiency.

The basic components of this approach to assessing important differences that exist among the various corporate governance practices around the world are as follows:

National business systems differ - in particular with respect to corporate governance;

The differences stem from differences in key social institutions (government regulation, the financial system, labor-market institutions, culture);

In contrast, business systems and governance are presumably less influenced by microeconomic factors like transaction costs;

The more differentiated the key social institutions are, the more differentiated the nature of the business system, and differentiation may be expected to increase over time as a function of economic development - in particular, greater differentiation is expected in the Anglo-American business system, and,

Individual business systems develop distinctive, viable business philosophies and ways of doing business.

Given these diverse definitions and differences in corporate governance practice, as well as the drastically different settings involved with corporate governance, there is little wonder that there have been some significant cross-cultural issues emerge in the debate over the proper amount and type of corporate governance that is most appropriate and effective for a given organization and the larger society in which it competes. Some current trends in international corporate governance, though, can help shed some light on what is taking place in corporate governance approaches being used in various countries around the world and how these trends have affected corporate management and performance, and these issues are discussed further below.

Current Trends in International Corporate Governance.

Although international commerce is as ancient as mankind itself, the current trends in international corporate governance are being fueled in large part by the same forces that are driving the globalization of the world's marketplaces and the increasing interdependence of these nations on each other for economic security. A study by Pedersen and Thomsen reports that an increasing amount of research has been focused on the existence of significant international variations in corporate governance over the last two decades or so; however, there remains a paucity of systematic research concerning the precise determinants of international differences in corporate governance. According to these authors, "Instead, the existence of international differences as such has been advanced as an argument against economic ownership theory. The differences suggest that differing histories, cultures and paths of economic development better explain the differing structures than economic theory alone."

Therefore, one of the more interesting - and challenging - issues involved with the globalization of the world's marketplace has been the need to develop more harmonious approaches to trade where business leaders and investors can be confident of the viability of the enterprises with which they conduct business despite a wide range of disparities in corporate governance practices. For example, in her essay, "Broadening Corporate Responsibility," Aaronson (2002) notes that, "Given that capitalism today is global as well as local, the U.S. must work with its allies to write international corporate governance norms. But we need to use this opportunity to think more broadly about how to reassure global economic confidence long-term. All of the reform efforts to date focus on a narrow definition of corporate responsibility." According to the International Corporate Governance Network (2008), "As global markets are gripped by volatility, corporate governance reform is yet again at the head of the legal and regulatory agenda." Indeed, as will… [END OF PREVIEW]

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International Developments in Corporate Governance.  (2008, November 26).  Retrieved July 17, 2019, from https://www.essaytown.com/subjects/paper/international-developments-corporate/9971138

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"International Developments in Corporate Governance."  26 November 2008.  Web.  17 July 2019. <https://www.essaytown.com/subjects/paper/international-developments-corporate/9971138>.

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"International Developments in Corporate Governance."  Essaytown.com.  November 26, 2008.  Accessed July 17, 2019.
https://www.essaytown.com/subjects/paper/international-developments-corporate/9971138.