Convergence of Corporate Governance: Critical Review and Future Directions. Toru Yoshikawa, Abdul A. Rasheed

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388
CorporateGovernance:AnInternationalReview,2009,17(3):388–404
Convergence of Corporate Governance: Critical
Review and Future Directions
Toru Yoshikawa* and Abdul A. Rasheed
ABSTRACT
ManuscriptType:Review
Research Question/Issue: Convergence in corporate governance across countries has been a subject of interest and
controversyinavarietyofdisciplines.Weattempttoaddressanumberofrelatedresearchquestions:(1)whatconstitutes
convergence?(2)whatarethedriversthatpropelcorporationsindifferentnationstowardsconvergence?(3)whatarethe
majorimpedimentsthatstandinthewayofconvergence?(4)whatempiricalevidencedowehavetosuggestthatweare
movingtowardsorawayfromconvergence?and(5)whatwouldbesomeproductiveavenuesforfurtherresearchonthis
topic?
Research Findings/Results: Despite the vigorous intellectual position of the proponents of convergence, there is only
limitedevidencetoindicatethatsuchconvergenceisactuallyoccurring.Evenwhenthereisostensibleconvergence,much
ofitisconvergenceinformratherthansubstance,andgovernanceconvergenceisnotacontext-freephenomenon.
Theoretical Implications: Our review of the past literature suggests that increasing integration of product and capital
markets is leading to changes in corporate governance around the world, but there is only limited evidence that such
changesconstituteconvergence.Governancechangesseemtobeprimarilyattributabletothequestforgreaterefficiencyin
governance and enhanced legitimacy in capital markets. However, local forces such as institutional embeddedness and
politicscanhindergovernancechangesorcreate“hybrid”practices.
Practical Implications: The ideal corporate governance may be institution- and firm-specific and an imposition of new
practicesorstandardsmaynotleadtointendedpolicyorperformanceoutcomes.
Keywords:CorporateGovernance,Convergence,BoardofDirectors,CapitalMarkets
INTRODUCTION andpoliticalconsensusinitsfavor.Ontheotherhand,many
otherresearchershavepointedtothedifficultiesinvolvedin
In recent years, there has been considerable controversy bringing about convergence in corporate governance
about both the desirability and inevitability of conver- (Bebchuk and Roe, 1999; Guillen, 2000; Gilson, 2004).
gence in the governance practices of public corporations. Researchers who study patterns of change in economic
The normative case for such convergence was most force- systems argue that economic institutions tend to adapt
fullymadebyHansmannandKraakman(2001).Theyargue foreign practices to fit local institutional contexts (Djelic,
thatthereisalreadyanormativeconsensusthatisinducing 1998; Vogel, 2003). This suggests that increasing globaliza-
corporate law and practice to converge towards the share- tion will likely lead to hybridization, rather than conver-
holder value maximization model. This is because alterna- gence (Pieterse, 1994). Yet others have even questioned the
tives such as the managerial-, labor-, and state-oriented wisdombehindpushingforsuchhybridization.
models are not viable competitively in globally integrated Regardlessofhowoneperceivestheinevitabilityordesir-
product markets. Similarly, the search for low-cost capital ability of convergence of corporate governance practices
alsoforcesfirmstocomplywiththeshareholdervaluemaxi- around the world, important changes have indeed been
mization model. Furthermore, they argue that the share- occurring in corporate governance systems in all major
holder model creates and sustains a supportive ideological industrialized and even emerging countries in recent years
(e.g., De Nicolo, Laeven, and Ueda, 2008). These changes
present great opportunities for researchers in various disci-
*Addressforcorrespondence:ToruYoshikawa,DeGrooteSchoolofBusiness,McMas- plinessuchaseconomics,strategy,andorganizationtheory
terUniversity,1280MainStreetWest,Hamilton,ON,CanadaL8S4M4.Tel:905-525-
9140Ext.20090;E-mail:[email protected] to explore international corporate governance at both the
©2009BlackwellPublishingLtd
doi:10.1111/j.1467-8683.2009.00745.x
CONVERGENCEOFCORPORATEGOVERNANCE 389
institutional and firm levels. In fact, the causes and conse- TABLE1
quences of such changes and the process of changes are ConvergenceDimensionsinCorporateGovernance
attractingincreasingresearchattention. Research:AnIllustrativeList
In this review paper, we attempt to address a number of
related research questions on the issue of convergence on Level Dimensions
the basis of extant scholarship on the subject. First, what
constitutes convergence? Second, what are the drivers that
Institutional/ 1. Adoptionofgoodcorporategovernance
propel corporations in different nations towards conver-
National codes
gence?Third,whatarethemajorimpedimentsthatstandin
Level 2. Legalreformorregulatorychanges
thewayofconvergence?Fourth,whatempiricalevidencedo
• Requirementofoutsidedirectors
we have to suggest that we are moving towards or away
fromconvergence?Finally,whatwouldbesomeproductive • Morestringentdisclosure
avenues for further research on this topic? To answer these • Greaterprotectionofminority
questions, we review research in various academic disci- shareholdersandcreditors
plines that have seen growing interest on the topic of con- • Relaxedtakeoverrules
vergence,namely,finance,economics,law,andmanagement 3.Countrylevelchanges
andorganizationtheory. • SpreadofCEOoptionpay
• Trendinhostiletakeovers
• Presenceofinstitutionalinvestors
WHAT IS CONVERGENCE?
FirmLevel 1. Adoptionorincreaseinthenumberof
Broadly speaking, in the context of corporate governance, outsidedirectors
convergencereferstoincreasingisomorphisminthegover- 2. Greaterinformationdisclosure
nance practices of public corporations from different 3. Adoptionandcoverageofexecutive
countries. Such a definition is too general and complete stockoptionpay
isomorphismisunlikelyevenamongfirmswithinacountry.
Hence,fromthepointofviewofaresearcher,itisimportant
to have more operationally clearer definitions of conver-
gence.Researchershavemadeadistinctionbetweenconver- tion of convergence it is important to be clear about what
gence in form and convergence in function (Gilson, 2004). kind of convergence we are discussing.
Convergenceinformrelatestoincreasingsimilarityinterms Any discussion about convergence is incomplete unless
of legal framework and institutions. Convergence in func- weareabletospecifywhattheentitiesinagivengroupare
tion suggests that different countries may have different convergingtowards.Toillustrate,astatementthatJapanese
rules and institutions but may still be able to perform the and American governance is converging could mean a
same function such as ensuring fair disclosure or account- numberofdifferentthings.First,itcouldmeanthatAmeri-
ability by managers. Functional convergence, which La can governance practices are becoming more like Japanese
Porta, Lopez-de-Silanes, Shleifer and Vishny (2000: 20) practice. Second, it could mean that Japanese governance is
describe as “decentralized, market-driven changes at the becoming more like American governance. Third, it could
firmlevel,”ofcorporategovernancepracticesappearstobe mean that both are converging towards the midpoint
occurringwithgreaterregularity. betweenthem.Finally,itcouldalsomeanthatbothsystems
Khanna, Kogan and Palepu (2006) recently made a dis- are moving towards some kind of a normative ideal that is
tinction between de jure convergence and de facto con- very different from their current positions. Despite these
vergence. When two countries adopt similar corporate possibilities of convergence, the extant literature generally
governance laws, there is de jure convergence between examines convergence in terms of the adoption of some
them. When actual practices converge (i.e., practices are elements of the Anglo-American or US governance system
actually implemented), it is referred to as de facto conver- and practices by countries and firms outside the Anglo-
gence. This distinction can be illustrated with an example American zone (e.g., Reed, 2002; Khanna and Palepu, 2004;
from a different field. All countries have rules against Khanna et al., 2006; exceptions include Toms and Wright,
briberyandcorruption.Thatis,thereisdejureconvergence. 2005). Previous research has examined, for example, the
However, the actual prevalence of corrupt practices and adoptionofgoodgovernancecodesattheinstitutionallevel
enforcementoftherulesagainstsuchpracticesvarysignifi- (e.g., Aguilera and Cuervo-Cazurra, 2004) and various
cantly across countries, suggesting that there is no de facto outsider- or market-oriented practices such as independent
convergence. A similar notion is decoupling where an actor directors, stock-based executive compensation, and greater
claimsconformityoradoption,yetimplementsanewprac- corporate information disclosure (Tuschke and Sanders,
tice differently or does not actually implement it (Meyer 2003; Fiss and Zajac, 2004; Markarian, Parbonetti and
and Rowan, 1977; Fiss and Zajac, 2004).Yet another type of Previts,2007;SandersandTuschke,2007),thekeyelements
convergence mentioned in literature is contractual conver- oftheAnglo-Americanmodel,atthefirmlevel.Table1pro-
gence (Gilson, 2004). When existing institutions lack the vides an illustrative listing of the various dimensions of
flexibility to respond without formal change and political convergence that have been examined in empirical studies.
barriers limit the capacity for formal institutional change, One of the sources of strength as well as confusion in
an alternative would be contracts. Hence, in any examina- convergenceresearchistheissueofwhatisconverging.The
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390 CORPORATEGOVERNANCE
FIGURE1
ConvergenceinCorporateGovernance:AnAnalyticFramework
Drivers of
Convergence
Institutional Corporate
Effects of
Convergence Governance
Convergence
(National Level) Convergence
(Firm Level)
Impediments to
Convergence
rathergeneraltermofconvergencehasbeenusedtoinclude country,itcouldbeviewedasamimeticprocess.Finally,the
convergence in systems, rules, regulations, structures, and demandsforprotectionofminorityshareholders,betterdis-
processes.Whileeachoftheseaspectsisimportantinitsown closure,stock-basedcompensation,etc.havetakenonanor-
right, the differential focus of different studies often makes mativestatusacrosscountriesandhavethusbecomepartof
comparisonsacrossthemproblematic.AsGinsbergandVen- the reform agenda in a large number of industrialized
katraman(1985:422)pointout, nations.Forexample,internationalharmonizationofdisclo-
sure and accounting standards works to promote conver-
ananalyticreviewschemeisnecessaryforsystematically
gence (Coffee, 1999). In short, from an institutional
discerningpatternsfromawidelydifferingsetofstudies
perspective,firmsthatareexposedtodifferentinstitutional
and evaluating the contributions of a given body of
environments are pressured to adopt practices that have
research.
institutionallegitimacyforsymbolicreasons.Inthissection,
The broad analytic framework we adopt in this paper is we will examine some of the more important drivers of
presented in Figure1. There are forces that push countries convergencethathavebeendiscussedintheliterature.
and firms within countries towards convergence in gover- Althoughwediscusseachofthedriversindependently,it
nance practices. Similarly, there are also very powerful is important to recognize the potential for interactions
factorsthatimpedesuchconvergence.Inourreview,wecall among them. For example, we discuss the integration of
theseforces“DriversofConvergence”and“Impedimentsto financialmarketsandthediffusionofcodesofgoodgover-
Convergence”respectively.Whetherconvergenceoccurs,at nance as separate drivers, but it is quite likely that these
what speed it occurs, and to what degree it occurs are ulti- driverscanreinforceeachother.Similarly,theintegrationof
matelydeterminedbytheinterplayofthesetwoforces.The product markets and financial markets may reinforce each
driversandimpedimentscanaffectconvergenceatboththe otherasglobalizationofafirm’soperationscanleadthefirm
countrylevelandfirmlevel.Furthermore,institutionalcon- toseekforeigncapital.
vergence at the country level can lead to convergence in
governance practices at the firm level. Finally, convergence
canhaveimplicationsforfirmlevelperformance. Integration of Financial Markets
Theintegrationoffinancialmarketshasbeenofferedasthe
DRIVERS OF CONVERGENCE primary driver of convergence of governance practices
(Nestor and Thompson, 2000; Khanna and Palepu, 2004).
Convergence proponents, who emphasize efficient market Nationalfinancialmarkets,whichoperatedinrelativeisola-
considerations, argue that globalization accelerates compe- tionuntilrecently,havesuddenlybecomemoreintegratedin
titionover“bestpractices,”andfirmsthataremoreexposed thelasttwodecadeswithsignificantimplicationsforgover-
to global markets are compelled to adopt the Anglo- nance. Financial market integration takes many forms
American model, as it is seen as a de facto global standard including listing by firms from one country in the stock
(HansmannandKraakman,2001).Ontheotherhand,insti- exchanges of other countries, increasing foreign portfolio
tutional theory holds that organizational fields tend to investment in both developed and developing countries,
become isomorphic over time as a result of three kinds of cross-border mergers, and acquisitions, and free capital
pressures – mimetic, normative, and coercive (DiMaggio flows across countries. Each of these has implications for
andPowell,1983).Eachoneofthesepressurescanbefound convergencebecausetheybringaboutafundamentaltrans-
in the case of corporate governance as well. For example, formationintheownershipstructureofcorporations.
when a firm from one country accesses capital markets of One of the most interesting developments in equity
anothercountry,ithastoconformtotheregulatoryrequire- marketsinrecentyearshasbeenthenumberoffirmsthatlist
mentsofthatmarketwhichactasacoerciveforce.Similarly, theirsharesinmultipleexchangesaroundtheworld(Chem-
when firms from one country begin to follow what they manur and Fulghieri, 2006; Bell, Moore and Al-Shammari,
perceive to be the best governance practices from another 2008).TheUSandLondonstockexchangeshaveseenahuge
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CONVERGENCEOFCORPORATEGOVERNANCE 391
increase in the number of foreign listings. Foreign issuers exhibitthegovernancecharacteristicsofboththecountries.
enteringtheseexchangeshavetoincursignificantregulatory Thatis,somegovernancecharacteristicsofthecountryofthe
andcompliancecosts.Thepresenceofthesenon-trivialcosts, acquiredfirmarelikelytoberetained,butgovernanceprac-
however, has not discouraged the flow of foreign equity tices of the acquirer’s home country will also be imple-
listings (Saudagaran and Biddle, 1995). Even more interest- mented,thusresultinginconvergence.
ingly,anincreasingnumberoffirmsarealtogetherforegoing
theirdomesticequitymarketsandaremakingtheirfirstissue
of their equity in New York or London (Chemmanur and Product Market Integration
Fulghieri, 2006). On the surface, it would seem that firms
Can product market integration have an effect on gover-
would be interested in listing in countries with the least
nance similar to financial market integration? The opinion
demandingregulatoryrequirementsinatypical“racetothe
on this issue is somewhat divided, but proponents of con-
bottom.”Butthepatternthathasbeenobservedisexactlythe
vergence argue that, in the long run, product market inte-
opposite. The explanation lies in the fact that when a firm
gration and the resulting global competition will have the
decides to list in a foreign market with higher disclosure
sameeffect(KhannaandPalepu,2004).Here,corporategov-
standards,essentiallytheyareengaginginabondingmecha-
ernanceisviewedasatechnologyoranewinnovation,and
nism, signaling to investors that they are willing to comply
inaneraofglobalcompetitionfirmshavenoalternativebut
with higher standards than required in their home country
to adopt the most innovative practice or face competitive
(VaalerandSchrage,2006).Suchbonding,inturn,hasbeen
failure.Focusingonthepatternsofdiversificationstrategies
foundtoincreasethefirm’ssharevalue(Coffee,2002).Thus,
across industries, Kogut, Walker andAnand (2002) present
foreignlisting,througheithercrosslistingorIPOs,although
an argument that technological and market forces compel
motivatedbythedesiretoincreasefirmvaluation,resultsin
firmstoadoptsimilarstrategiesacrosscountries.Inasimilar
convergenceasaby-product.
vein, different governance systems are seen as engaged in
Thelast15yearshasseenasubstantialincreaseinforeign
Darwinian competition (Kester, 1997). Nations and firms
portfolio investment in virtually all regions of the world
that are following suboptimal governance systems will be
(Useem,1998).Thisincreasehasbeenfueledbyanumberof
less efficient and will fail or will have to adopt the more
reasonsrangingfromthehigherratesofstockvalueappre-
efficient governance system. In either case, the result is
ciation in countries such as China and India, the relatively
convergence.
attractive equity values in Japan in the post-bubble years,
Extending this perspective of competition among gover-
andthenormaldesireofinvestorstodiversifytheirportfo-
nance systems, it is often argued that competition will lead
liostoreducerisk.Foreigninvestorstypicallyownrelatively
to convergence of corporate governance systems. At the
small stakes and trade their shares frequently (Davis and
institutionallevel,itisarguedthatgovernmentscompeteto
Steil, 2001). Small stakes in multiple companies provide
attract firms to locate their operations in their countries
them with both diversification and liquidity (Tesar and
(Witt,2004).Thisleadseachgovernmenttointroduceattrac-
Werner, 1992). Foreign portfolio investors are profit-driven
tive regulations including those on corporate governance.
market investors and are free from local embeddedness
Asglobalproductmarketcompetitionintensifies,corporate
through social, historical, and transactional close ties with
governance systems at the firm level also become similar,
firms enjoyed by stable domestic owners in countries such
because firms decide to adopt more efficient elements of
as Japan (Charkham, 1994; Aguilera and Jackson, 2003).
corporategovernancesystems(Witt,2004).
Attractingforeigninstitutionalinvestorsisconsidereddesir-
able by many companies because the resulting demand for
thestockcandriveupthepricesandincreasefirmvaluation.
Diffusion of Codes of Good Governance and
But in order to attract foreign investors, it becomes neces-
Harmonization of Accounting Rules
sarytocomplywiththeirexpectationsofgoodgovernancein
matterssuchasdisclosureandrespectoftherightsofminor- Yet another driver of convergence in governance is the
ity shareholders. Mass selloffs can negatively impact stock development and diffusion of codes of good governance
prices,raisethecostofcapital,andenhancethelikelihoodof (Aguilera and Cuervo-Cazurra, 2004; Collier and Zaman,
a hostile takeover (Porter, 1992). Parrino, Sias and Stark 2005)aswellastheharmonizationofaccountingrulesacross
(2003)providedirectevidencethatselloffsbyinvestorshave countries (Coffee, 1999). What drives the diffusion of the
adverse consequences for managers including dismissal, as good corporate governance codes? Aguilera and Cuervo-
boards of directors act to retain investors. Thus, the key is Cazurra (2004) specifically examine this issue and find that
not only to attract foreign investors but also to retain them. countries with weak shareholder protection, high govern-
Inordertoretainforeigninvestors,itbecomesimperativeto mentliberalization,andastrongpresenceofforeigninstitu-
live up to their expectations of good governance (David, tional investors tend to develop the codes. They argue that
Yoshikawa,ChariandRasheed,2006). legitimation pressures (when a country has weak share-
Anotherwaythatintegrationofcapitalmarketscanpoten- holder protection rights) and efficiency needs because of
tially lead to convergence is through cross-border mergers market pressures drive the diffusion of the codes. Hence,
andacquisitions.Insomecases,listinginaforeignexchange theirstudysuggeststhatbothinstitutionalandmarketpres-
maybethefirstindicationthatthefirmisconsideringacqui- sures play a role in spreading the good corporate gover-
sitionsinthatcountrythroughstockswaps.WhenaGerman nancecodes.
orJapanesefirmisacquiringanAmericanfirmorviceversa, Good governance codes are often not mandated legal
it seems reasonable to assume that the new entity will requirements but a set of norms, adherence to which is
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392 CORPORATEGOVERNANCE
voluntary. They represent what public or private organiza- impedeconvergence.Abetterunderstandingoftherelative
tions consider as best practices and following them can intransigenceofnationalgovernancesystemsisnotpossible
bring a firm considerable legitimacy. The publication of the without an examination of the factors that impede conver-
CadburyCommitteereportintheUKin1992wasaseminal gence.Amongthedifferentexplanationsforlackofconver-
development that was followed by similar development of gence are structure- and rule-driven path dependence,
codes of good governance in a number of countries (Stiles complementarities among existing institutions and rules,
and Taylor, 1993). Codes can be developed by stock prevalence of multiple optima, rent-seeking by interest
exchanges, government, directors’ associations, managers’ groups,differencesinpropertyrightregimes,economicdif-
associations,professionalassociations,orinvestors,associa- ferencesanddifferencesinsocialnorms,andlackofconsen-
tions.Regardlessofwhoissuesthecode,oncetheyarepub- susonanideal.Eachoftheseisdiscussednext.
lished, they become an important source of normative
institutional pressure for convergence within a country. If
Path Dependence
the codes are similar across countries, then they become a
driver of global convergence as well. As Aguilera and Pathdependencereferstoasituationwherethecurrentstate
Cuervo-Cazurra (2004: 424) point out, “integration in the of a system is determined not only by its initial conditions
globaleconomyfunctionsasatransmissionbeltfortheneed but also by the path it took (North, 1990; 2005). In other
to innovate and facilitate the transfer of practices across words,theevolutionarytrajectoryofthegovernancesystem
countries.” ofacountryistheresultofthousandsofindividualhistorical
One of the major problems that a firm faces when it events and policy responses to them. Given that no two
decidestolistinaforeignexchangeistheneedtorestateits countries have the same sets of historical events or similar
accountsfollowingthestandardsprevailinginthatcountry. societal responses to them, the net result is persistence of
Similarly, investors interested in making portfolio invest- existing systems and divergence across systems. For
mentsinothercountriesfacetheproblemofunderstanding example, banks play a relatively minor role in monitoring
the accounting practices followed in that country. Clearly, corporations in the US, compared with Japan or Germany,
the prevalence of different accounting standards is an becauselegislationenactedalmostacenturyagospecifically
impediment to capital flows across countries. This problem restrictedtheroleofbanks.Evenifwehypotheticallyagree
is currently being addressed by the development of a core with the perspective that bank monitoring reduces agency
setofinternationalaccountingstandardsbytheInternational costsandencouragesalong-termorientation,anylegislation
Accounting Standards Committee. The harmonization of permittingbankstoownlargeblocksofsharesisunlikelyto
accounting standards can greatly facilitate the process of maketheUSgovernancesystemsimilartothatofGermany
convergence (Coffee, 1999), mainly through mandating orJapan(Roe,1993,1994).Thatis,achangeinlawallowing
uniform disclosure requirements. In the global context, banks to own shares in companies cannot by itself reverse
Markarianetal.(2007)comparesdisclosurepracticesin1995 thetrajectoryofchangesthatunfoldedoverthelastseveral
and 2002 among large multinational firms and shows that decades.
there was greater information disclosure in 2002. Another Bebchuk and Roe (1999) make a distinction between
example of changes in governance practices in response to structure- and rule-driven path dependence. Structure
regulatory changes is the changes made by US firms in drivenpathdependencereferstothedirecteffectofowner-
response to the Sarbanes-Oxley Act of 2002 (Valenti, 2008). ship structures on subsequent ownership structures.
Apart from codes of governance and accounting standards, Structure-drivenpathdependencecanariseoutofanumber
there are a number of other normative pressures that also of factors. First, adaptive sunk costs refer to adaptations that
contribute to convergence such as harmonization of disclo- firms in a country may have made in areas such as debt
surerequirementswithintheEuropeanUnionandissuance structureorincentivecompensationschemesinresponseto
of the Transparency Directive. For example, Collier and diffuseownershipofsharesthatsubsequentlymakechanges
Zaman(2005)foundintheirstudythattheauditcommittee in ownership structure less efficient. Network externalities
concept, which was recommended by the European Com- refer to the fact that a governance characteristic such as
mission,hasbeenwidelyacceptedinEuropeancountries. efficientownershipstructureforafirmmightdependonthe
ownershipstructureofotherfirmsinthatcountrybecauseof
the advantages of adhering to the dominant form. Endow-
IMPEDIMENTS TO CONVERGENCE ment effects refer to the situation wherein players having
control under an existing structure can affect the value that
Despitethemanyforcesthatpushfirmsindifferentnations alternative structures can produce. Much of the same logic
towardsconvergenceincorporategovernance,nationalgov- applies for rule-driven path dependence as well. Rule-
ernancesystemshavenotbeenracingtowardsconvergence driven path dependence arises from the effect that initial
(Aguilera and Jackson, 2003). Even when changes occur, ownership structures have on subsequent structures
they seem to be the direct consequence of endogenous through their effect on legal rules governing corporations.
factors within a country rather than the result of global These legal rules include corporate law, laws governing
factorspushingtowardsconvergence(Hermes,Postmaand insolvency, labor relations, and financial institutions. Inter-
Zivkov, 2006). For example, the Sarbanes-Oxley legislation estingly,therulesthemselvesarepathdependent.Rulesare
intheUSwasapublicpolicyresponsetobreakdowninthe rarely enacted for efficiency reasons and are influenced by
systemratherthantheresultofadrivetowardsanormative prior laws and existing ownership structures. For example,
global ideal. Thus, clearly there are forces at play that once a set of rules are in place and the companies in that
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CONVERGENCEOFCORPORATEGOVERNANCE 393
country have incurred costs in adapting to them, under eliminate any instances of “fortuitous divergence” (Hans-
normal circumstances the sunk costs would be used as a mannandKraakman,2001).
logicagainstchangingtherules.
Rent Seeking by Interest Groups
Complementarities Governance structures can persist even after they have
become demonstrably suboptimal because of the presence
Theprevailinggovernancepracticesofacountryareresults
and actions of parties who resist change, because it would
ofa“systemofcomplementaryinstitutions,legalrules,and
reduce their private benefits of control while the efficiency
practices where improving any one element independently
gains from change would be shared by several actors
may actually hurt the efficiency” of the whole system
(Coffee,1999).Rent-seekingactionscouldcomefromawide
(Khanna et al., 2006: 71). Schmidt and Spindler (2004:115)
range of actors such as labor unions, banks, controlling
defineasystemascomplementaryifelementsofthesystem
shareholders, and lawyers (Coffee, 1999; Bebchuk and Roe,
fittogetherwell,i.e.,they
1999; Khanna et al., 2006). Many European countries have
take on values such that they mutually increase their lawsinplacethatallowunequalvotingrights(asopposedto
benefitintermsofwhatevertheobjectivefunctionorthe the one share, one vote norm), specifically designed to
standardforevaluatingthesystemmaybeand/ormutu- protect family control. Any convergence towards the US
allyreducetheirdisadvantagesorcosts. model in these countries, for example, towards the one-
share, one-vote norm would inevitably dilute the control
Aguilera, Filatotchev, Gospel and Jackson (2008) point out
rightsthesegroupscurrentlyenjoy.Unlessgroupswhohave
howindependentdirectors,executivepayincentives,infor-
an interest in changing the balance of power can mobilize
mation disclosure, and takeover markets form a key set of
adequatepoliticalsupportforamendingtheserules,regula-
complementary elements that lie at the very core of the
toryinertiawillcontinuetoperpetuatethecurrentsystem.
Anglo-American form of corporate governance. Similarly,
the core elements of the Japanese system include high reli-
ance on debt, monitoring by debt holders, absence of a Differences in Property Rights Regimes
market for corporate control, cross-shareholding by firms
Although respect for property rights are at the heart of all
within a business group, and long-term employment prac-
capitalist economies, there is considerable variation in the
tice which encourages investment to develop firm-specific
precise ways in which property rights are defined and
skills (Aoki, 1994). The German system also relies on
enforced in different countries. Milhaupt (2004) argues that
complementary components such as the important role of
governments play a large role in the allocation of control
major banks and labor in corporate governance, although
rights and the legal enforcement of such rights. Although
theroleofthebankshasbeengraduallychanginginrecent
integration of product, financial, and labor markets may
years(Hackethal,SchmidtandTyrell,2005).Hence,fromthe
induce managers to adopt similar organizational structures
perspective of institutional complementarity, effectiveness
andpractices,therearenoequivalentforcesactinginpolitical
of individual governance practices cannot be evaluated in
marketsofindividualcountriestobringaboutsimilarrules
isolation. For example, high dividends may be beneficial to
withregardtopropertyrights.Howdodifferencesinprop-
shareholders in the US context as it would reduce the dis-
erty rights regimes impede convergence? Milhaupt’s (2004:
cretionary cash available to managers, but in Japan where
211) core argument is that “property rights institutions are
cross-shareholdingistheprevailingnorm,higherdividends
theprincipalsourceofdiversityamongnationalgovernance
wouldonlymeanfirmspayingdividendstoeachotherwith
systems.”Whenpropertyrightsregimesareweak,thatisin
nonetreductionindiscretionarycash.
countries where governments retain considerable control
rights,wewouldtypicallyobservesmallerfirms,familyown-
ership,andverylittledispersioninownership.Insuchcoun-
Multiple Optima tries,theonlywaytoovercomeconstraintsongrowthinsize
wouldbetoinvestin“politicalcapital”asisthecasewiththe
Khanna et al. (2006) point out that complementarities can
chaebolsofKoreaorthebusinessgroupsofIndia.Suchinvest-
inducemultipleoptima.Thatis,withorwithoutpathdepen-
mentsaremadewiththeassumptionoflong-term,repeated
dence, nations can end up choosing different bundles of
interactionsthatcanberecoveredonlyovertime,thuscreat-
practices that yield equivalent long-run corporate gover-
ing a strong incentive for the maintenance of status quo.
nance. Once such equivalence is achieved, there is little
Therefore,convergence,atbest,willbe“weak,limited,and
incentive to change from one system to another, given that
episodic”(Milhaupt,2004:220).
such changes would incur transaction costs and encounter
resistance from various parties. The belief that there is no
singleoptimalmodelofconvergenceisreinforcedbythefact
Economic Nationalism and Differences in
thatanumberofempiricalstudieshaveproducedinconsis-
Social Norms
tent and ambiguous results (Demsetz and Lehn, 1985;
Thomsen and Pedersen, 1996; Coles, McWilliams and Sen, While the dominant view in public discourse seems to be
2001).Interestingly,proponentsofconvergencerefertomul- that globalization is an unstoppable force, a view most elo-
tiple optima as “harmless mutations” and argue that quentlypresentedbyauthorssuchasFriedman(2006),there
networkefficienciesofacommonstandardformarelikelyto isaschoolofthoughtthatglobalizationandtheconsequent
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394 CORPORATEGOVERNANCE
economic integration are a terrifying force in the eyes of law makers and corporate players genuinely disagree
many nations. It is likely that many nations would respond today, have genuinely disagreed in the past, and in all
to the homogenizing influence of globalization with very likelihoodwillcontinuetodisagreeastowhichcorporate
strong assertions of national differences and identity rulesandstructuresarebest.
(Barber,1995).Financialmarketintegrationleadstoforeign-
Even at the domestic level, past research suggests that
ersbuyingassetsofacountrythroughbothforeignportfolio
the relationship between governance and performance is
investments as well as through cross-border acquisitions.
context-specific(Colesetal.,2001).Atanevendeeperlevel,
These investors often demand corporate governance
there are profound differences among countries about the
reforms. However, this could result in a backlash against
verypurposeofapubliclylistedcorporation(Witt,2008).As
foreign investors, rendering contestability of control more
weexplainedintheprevioussection,developmentofacon-
difficult for outsiders. Another obstacle in the path of con-
sensus about a normative ideal form of corporate gover-
vergence is the presence of social and commercial norms.
nanceisnotpossiblewhenthereisnotevenaconsensuson
Suchnormscanoften“supplementortrumpthecommands
thepurposeofthecorporation.
of formal legal rules or explicit commands” (Charny, 2004:
303). Also, the objectives of business organizations differ
fromonecountrytoanother(Witt,2008);forexample,social EMPIRICAL STUDIES ON CONVERGENCE
obligationsareimportantinsuchcountriesasGermanyand
Japan whereas the interests of shareholders are considered Astheissueofconvergencehasbecomeatopicofvigorous
paramount in the US and UK (Dore, 2000). As discussed academic debate, not surprisingly, efforts to empirically
earlier, there are initiatives to harmonize regulations at the examine the magnitude and direction of convergence in
EuropeanUnionlevel.However,itisalsosuggestedthatthe governancepracticeshavefollowed.Duringthelastdecade,
likelihood of cleavage because of the “clash of capitalisms” anumberofstudieshaveexaminedconvergenceintermsof
among European countries may also increase (Callaghan various governance dimensions. We believe that this is an
and Hopner, 2005). Hence, even at the regional level, both opportunetimetotakestockoftheaccumulatedevidenceof
theforcesforconvergenceandforcesagainstthemarelikely the last decade, see what generalizable conclusions can be
to co-exist in some state of uneasy equilibrium. If there is drawn from them, identify unresolved issues, and suggest
divergence in the socially accepted objectives of the firms an agenda for future research. This is especially the case
across countries, it is entirely possible that the ideal corpo- becausewefindthatempiricalpapersonconvergencehave
rate governance structure may also be different across appeared in journals in diverse fields such as finance, eco-
countries. nomics, management, and organization theory. We system-
aticallysearchedforempiricalstudiesthathaveappearedin
majorjournalsineachoftheseareasusingapproachessuch
Lack of Consensus on an Ideal
as key word searches, citation trails, etc.A summary of the
Organizationalpractices,oncetheycometobeheldasideal studies we identified from major journals in these disci-
or as contributing to performance or legitimacy, have been plines is presented in Table2 and provides information on
found to diffuse across countries. Practices ranging from level of analysis, sample characteristics, measures of inde-
just-in-time inventory management techniques and total pendentanddependentvariables,andconclusions.
quality management to corporate restructuring and stock- At a very broad level, empirical studies on convergence
based compensation have spread across the world. There can be divided into two distinct groups. While one set of
may perhaps be a rather simple explanation for the lack of studies has attempted institutional comparisons with the
strong convergence in governance. Although authors such country as the unit of analysis, the second set of studies
as Hansmann and Kraakman (2001) would argue that glo- treats firms as the unit of analysis. The second group of
balizationwillleadtothediffusionofwhattheyconsideras studies,thatisstudiesatthefirmlevel,showsmuchgreater
the Anglo-American ideal to other countries, it is entirely variance than studies at the institutional level in terms of
possible that there is no consensus on what constitutes the sample characteristics. They range from study of a single
best governance system. This is because each model has firm (Khanna and Palepu, 2004) to several firms in a single
strengths and weaknesses that may manifest variously in country (Tuschke and Sanders, 2003) to a large number of
differentenvironments.Duringmostofthe1980sandearly firms in several countries (Khanna, Palepu and Srinivasan,
1990s, the Japanese model was held in high regard (Porter, 2004).Whilethemajorityoftheauthorshaveusedrelatively
1992),butitslusterhasdimmedinmorerecentyears.Simi- short time periods to examine convergence, exceptions
larly,theUSmodelwasconsideredoptimalforalongtime, include studies such as Toms and Wright (2005) who
but increasingly considerable dissatisfaction has been studied changes in corporate governance in the US and the
expressed about its many deficiencies such as its failure to UKfrom1950to2000.
prevent acts of corporate malfeasance, inability to reign in
runawayexecutivepay,anditsshorttermorientation.Inthe
Country Level Studies
absenceofconsensusaboutwhatwouldbeanidealsystem,
itisunderstandablethatfirmswithinindividualnationsare In one of the earliest studies at the country level, Guillen
in no hurry to completely abandon existing practices and (2000) investigated the shift in numerous corporate gover-
adopt practices that are seen as alien, of unproven quality, nance indicators such as share ownership by institutional
and doubtful transferability. This led Bebchuk and Roe investors and the adoption of long-term CEO pay among
(1999:127)tocommentthat over 40 countries and found that there are no major shifts
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CONVERGENCEOFCORPORATEGOVERNANCE 395
ResearchQuestionandFindings nvestigatestheshiftinsixcorporategovernanceindicatorsinupto43countriesandfindsthatnomajorshiftstookplacefromthelate1970s/early1980stothelate1990s. nvestigateswhethervariouscountrylevelvariableswouldbepositivelyrelatedtotheadoptionofcorporategovernancecodes.Itwasfoundthatcodesweredevelopedinresponsetobothendogenousandexogenousfactors.Itisarguedthatefficiencyneedsandlegitimationpressuresledtotheadoption.xaminestheeffectsofstakeholderpoweronthespreadofhostiletakeoversin37countriesandfindsthatshareholders’,workers’,andbanks’rightsaffectedtheadoption.Announcedhostiletakeoversincreasedwithgreatershareholders’rightsanddecreasedwithgreaterworkers’andbanks’rights.xaminesthechangesintakeoverregulations,especiallyonadoptionsofthemandatory-bidrule,theequal-treatmentprinciple,thesqueeze-outrule,andtheuseofvotingcaps,non-votingshares,dual-classandmultiplevotingshares.Thestudyfoundconvergenceintheregulations.
I I E E
r
o
TABLE2CorporateGovernanceConvergence Variables Changeinsixgovernanceindicators:stockofFDI;presenceofinstitutionalinvestors;balancebetweendebtandequityfinance;adoptionoflong-termCEOpay;andannouncedhostiletakeoversDV:whetheracountrydevelopedagovernancecode;numberofcodesdevelopedV:country’slegalsystem;anti-directrights;economicintegration;governmentliberalization;foreigninstitutionalownership;domesticcapitalmarket DV:announcedhostiletakeoversV:shareholderrights;laborrights;bankrights Changesintakeoverregulations
I I
n
o
EmpiricalStudies ampleandContext 7–43countries(samplesizevariesbythegovernanceindicator) 9countries 7countries 0Europeancountries
S 1 4 3 3
y
d arle
o Eat
ri /l
e so 9 8 4
p 0t 9 9 0
me 19780s90s –19 –19 –20
Ti earchLate1919 1978 1988 1990
s
e
Author(s)andyearofpublication Institution-LevelRGuillen,2000 AguileraandCuervo-Cazurra,2004 SchneperandGuillen,2004 Goergen,MartynovaandRenneboog,2005
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396 CORPORATEGOVERNANCE
ResearchQuestionandFindings xaminesthechangesofcorporategovernancesystemintheUSandUKduringthelast50yearsandshowsthatmonitoringbyshareholdersincreasedinbothcountries.xaminesthesimilarityandconvergenceofcorporategovernancepracticesbetweeneconomicallyinterdependentcountries.Thestudyfoundastrongrelationshipbetweendejureeconomicintegrationandgovernancesimilaritybutnodefactoevidenceofsimilarity.xaminestheadoptionofcorporategovernancecodesincivillawcountriescomparedwithcommonlawcountries.Civillawcountriesissuedcodeslaterthancommonlawcountriesandthecodesincivillawcountriesaremoreambiguousandlenient. nvestigatestheeffectofownershipontheadoptionofstockoptionpayandtransparentaccountingpracticesofGermanfirms.ThereisaninverseU-shapedrelationshipbetweenownershipconcentrationandthesegovernancereformmeasures.
E E E I
n n
TABLE2Continued Variables Historicalanalysisofchangesincorporategovernancesystems DV:legalprotectionofshareholdersandcreditorprotectionIV:degreeofcapitalmarket,productmarket,andlabormarketintegratiobetweenpairsofcountries ststudy–Comparisonofthediffusio1ofgovernancecodesamongcountrieswithdifferentlegalsystemsndstudy2DV:Coverageofcodes;StrictnessofcoderecommendationsIV:Commonlawcountries DV:adoptionofstock-basedincentiveplan;adoptionoftransparentaccountingstandards(GAAPorIAS)IV:ownershipconcentration
ampleandContext heUSandUK 9developedanddevelopingcountries 4countries:29civillawcountriesand15commonlawcountries 6listedGermanfirms
S T 4 4 7
d
o
ri 00 05 99
e 0 0 9
p 2 2 1
me 50– 98 92– 96–
Ti 19 19 19 19
h
c
Author(s)andyearofpublication TomsandWright,2005 etal.Khanna,2006 ZattoniandCuomo,2008 Firm-LevelResearTuschkeandSanders,2003
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CONVERGENCEOFCORPORATEGOVERNANCE 397
InvestigatescorporategovernancepracticesofInfosysandfindsthatthefirmadoptedUScorporategovernancepracticestoattracttalent,notbecauseofglobalcapitalmarketpressure.ExamineswhetherexposuretoUSmarketsledtogreaterdisclosurepracticesofforeignfirms.FindingsindicatethatgreaterinteractionswithUSmarketswereassociatedwithsimilaritiesindisclosurepracticesofforeignfirms.InvestigatestheeffectsofownershipstructureandCEOcharacteristicsontheadoptionofshareholder-orientedpracticesofGermanfirms.Resultsindicatethatblockholdingsbyreturn-orientedandpro-businessshareholdersledtotheadoptionofshareholdervalueorientation.Thestudyalsofoundthatsomefirmsespousedshareholdervalue-orientedpracticesbutdidnotimplementthem.Powerfulactorsreducedthelikelihoodof“decoupling.”Compares7GermanandUKfirmsintermsofthecoverageofESOandperformanceconditionsattachedtoESO.FindingsshowthattheUS-styleESOhavediffusedamonglargeGermanfirms,butwithdistinctlyun-Americanfeatures.ExaminestherelationshipbetweenglobalmarketexposureandadoptionofUScorporategovernancepracticesinfirmsin25emergingeconomiesandfindsthatnosuchrelationshipexists.
Qualitativestudy DV:informationdisclosure(overallandfinancialtransparency)V:interactionswithUSfinancial(listing,equityinvestment,FDI),product(export,operations)andlabor(businesstravel)markets DV:shareholdervalueorientation(value-basedmanagementcontrolsystem,stockoptionplansformanagement,internationalaccountingstandards)IV:ownershipstructure(banks,firms,government,families,otherinstitutions);CEO’sageandeducation DV:coverageofexecutivestockoptions(ESO),performanceconditionsofESO defactoDV:similaritytoUScorporategovernancestandards(CLSAindex)V:exposuretoglobalcapitalmarkets,globalproductmarkets,andgloballabormarkets
I I
y
tr n an
us ma ms
nd 4 rm 5
diain n2s Ger Gefir n2ges
nfosys,Insoftware 94firmsicountrie 12listedfirms matchedandUK 95firmsiemergineconomi
I 7 1 7 4
1 0 1
0 0 0
0 0 0
2 2 2
– – /
1 2 0 0 1
8 0 9 0 0
9 0 9 0 0
1 2 1 2 2
4 6
0 0
0 5 0
hannaandPalepu,2004 etal.hanna,2 ssandZajac,2004 uckandShahrim,200 etal.hanna,2
K K Fi B K
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