Corporate Governance in a Globalising World: Convergence or Divergence?: A European Perspective

229 Pages·2002·13.33 MB·English

by  Lutgart Van den Berghe

CORPORATE GOVERNANCE IN
A GLOBALISING WORLD:
CONVERGENCE OR
DIVERGENCE?
-A European Perspective-
CORPORATE GOVERNANCE IN
A GLOBALISING WORLD:
CONVERGENCE OR
DIVERGENCE?
-A European Perspective-
by
Lutgart Van den Berghe
University of Gent, Belgium
In collaboration with
Christoph Van der Elst
Steven Carchon
Abigail Levrau
KLUWER ACADEMIC PUBLISHERS
NEW YORK, BOSTON, DORDRECHT, LONDON, MOSCOW
eBookISBN: 0-306-47538-3
Print ISBN: 1-4020-7158-2
©2002 Kluwer Academic Publishers
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CONTENTS
Whichcorporate governancemodel will reign becomes amatter ofpublic
debate 1
Convergence ordivergence: evidencefrom thecorporate governance
literature 7
Convergence ordivergence in corporategovernance: Empirical evidence 29
Europeanconvergence or divergence: an evaluation by practitioners and
academics 89
Divergencewithin aconverging trend: atentativeframeworkforfurther
analysis and discussion 117
Executive summary 145
Concludingremarks andsuggestions forfurther reflectionandresearch 167
Bibliography 183
Appendices 197
LIST OF FIGURES
Figure 1.Corporate governance framework 2
Figure 2.Corporate governance schools 12
Figure 3.Corporategovernance ratings in 14 European countries: conformity
with stated governance criteria 17
Figure 4.Ownership participation of non-financial companies in Europe,
U.S. and Japan in the beginning and at the end of the 1990s (%) 38
Figure 5. Ownership participation of individuals in Europe, U.S. and Japan in
the beginning and at the end of the 1990s (%) 39
Figure 6.Ownership participation of public authorities in Europe, U.S. and
Japan in the beginning and at the end of the 1990s (%) 41
Figure 7.Ownership participation of banks in Europe, U.S. and Japan in the
beginning and at the end of the 1990s (%) 43
Figure 8.Ownership participation of insurance companies in Europe, U.S.
and Japan in the beginning and at the end of the 1990s (%) 44
Figure 9.Ownership participation of pension funds in Europe, U.S. and Japan
in the beginning and at the end of the 1990s (%) 45
Figure 10.Ownership participation of investment funds in Europe, U.S. and
Japan in the beginning and at the end of the 1990s (%) 46
Figure 11.Foreign ownership in Europe, U.S. and Japan at the beginning and
at the end of the 1990s (%) 47
Figure 12.Respect of the one-share-one-vote principle by European countries 59
Figure 13.Mechanisms contravening the one-share-one-vote principle' across
European countries 59
Figure 14.Take-overdefences used in European countries 69
Figure 15.Number of directors per board by country 73
Figure 16.Frequency of board meetings by country (absolute numbers) 76
Figure 17. Disclosure of directors’ main executive position by country (% of
companies providing information) 81
Figure 18. Disclosure of directors’ company shareholding by country (% of
companies providing information) 82
Figure 19. Participants’ view on the future corporate governance model for
listed companies (%) 91
Figure 20. The future governance of listed companies - Differences in view
by professional background of the respondents (%) 91
Figure 21. The future governance of listed companies - Differences in view
by geographical background of the respondents (%) 92
Figure 22. Participants’ view on the future of non-listed companies (%) 95
Figure 23. Participants’ view on the future of listed and non-listed companies
(%) 96
Figure 24. Participants’ view on the barriers to cross-reference (%) 97
Figure 25. Participants’ view on the transferability of parts of the corporate
governance system (country of origin perspective) (%) 98
Figure 26. Respondents’ view on the classes of entities on which corporate
governance recommendations should focus (%) 101
Figure 27. Respondents view on the need for intervention on corporate
governance by the European Commission (%) 107
Figure 28. The European Commission should not only focus on the
protection of minority shareholders but also tackle other topics,
like allowing the issue of non-voting stock (%) 108
Figure 29. Respondents’ view on the minimal contents of corporate
governance guidelines of accountability and fiduciary duties,
disclosure and integrity and ethical behaviour (%) 109
Figure 30. Enforcement of corporate governance issues (%) 110
Figure 31. Opinion of respondents, by activity class, on the enforcement of
corporate governance issues (%) 112
Figure 32. Governance pyramid 119
Figure 33. Positioning corporate governance 136
Figure 34. From a detailed firm taxonomy to a three-tier governance model 173
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LIST OF TABLES
Table 1. Evolution of market capitalisation as % of GDP (1975-2000) 30
Table 2.EquityraisedthroughIPOs as % ofGDP (1990-1999) 31
Table 3.Ownership structures inEurope, U.S. andJapanin thebeginningof
the 1990s (%) 34
Table 4.Ownership structures in Europe, U.S. and Japan at the end of the
1990s(%) 35
Table 5.Differences overtime(xl00%) 36
Table 6.Asset allocation of pension funds (1999) (%) 48
Table 7.Medianvotingblocks(*) ofthelargest shareholder 49
Table 8.Average(%) andmedian votingblockofthelargestshareholder,
classified by size of the company 51
Table 9.Number of and Averagevotingblocks(*) by shareholder type 52
Table 10. Duration periods of shareholding 53
Table11. Average duration periods of shareholding (in months) (*) 54
Table12. Shareholder rights and protection across countries 57
Table13. The origin of foreign direct investment by type of home-country
corporatelegal tradition, 1980 and 1997 63
Table14. Announced hostile corporate take-overs 68
Table15. Composition of the board: independentboard members (%) 74
Table16. Participantsfollowing the exemplary priority list in developing
corporate governance recommendations (%) 102
Table17. The danger of box ticking: priority for formality over reality 120
Table18. Defining a good governedand a poor governed corporation 140
Table19. Shareholderrights and protectionacross countries 200
Table20. Descriptive statistics on the origin of participants 216
Table21.Descriptive statistics on the activity of the participants 217
PREFACE
The seeds of this book were sown about five years ago, when the Vlerick Leuven
Gent Management School, Belgium's leading business school and the only one
which is Equis and AMBA accredited, realised that Belgium and the continent
lagged behind in understanding governance issues. The School also found that
Belgium and the continent lacked the appropriate tools to improve the somewhat
laid-back approach of corporates (and government) on this subject.
From that realisation came the rather unique initiative to create the Belgian
Directors' Institute (BDI). It remains unique because it combines a highly skilled and
motivated team of academic researchers dedicated to governance issues funded
exclusively by corporates. The Board of the BDI consists of industry leaders and
academics who ensure that findings are quickly translated into action programmes, a
network of nearly 500 directors exchanging experiences, monitoring themes and
participating in over 40 events a year. Finally, the BDI developed a training
programme for directors from which nearly 150 directors have "graduated".
While the Institute has always tried to establish a sound scientific basis for its
recommendations and teachings, this book being no exception, it does so to actually
change the governance map and, most importantly, the mindset of "real directors in
the real world".
In a small country that is multilingual, one of the preferred bases of multinational
companies (MNCs) and international organisations, and the capital of the EU, but
which is also a country where almost all corporates are internationally active or
internationally owned, an international view of governance matters prevailed from
the start.
While the Institute started with a large scale review of existing governance
practices in Belgium based on questionnaires and interviews of 500 Belgian
corporates, its initial book "International Standardisation of Good Corporate
Governance – Best Practices for the Board of Directors" addressed the many
international "legends" about governance and international standardisation of
governance.
As any observer of the field will confirm, attitudes have changed over the last
few years.
The view that globalisation would quickly and seamlessly drive governance
towards the single U.S. model has lost credibility. The Enron debacle has made
everybody realise that no model is infallible, nor, perhaps, inherently superior.
More importantly, it is increasingly apparent that different companies have different
governance requirements. Those requirements depend on factors that include the
company's size, stage of growth, legal and capital market environment, and
corporate culture and model. Of course, government owned corporations, many of
which have survived the wave of privatisations, require distinct governance concepts
that combine public and corporate policy considerations.
Perhaps governance thinking has matured enough to accept that simple recipes
do not suffice and that the study of governance requires more scientific analysis and
less dogmatic assumptions. In particular it has realised that when disaster has struck,
quite often within companies satisfying classic governance prescriptions, it was
because there had been poor integration between governance and basic good
management. There have even been situations where the seemingly transparent
satisfaction of governance principles helped to obscure bad accounting or other
practices.
In particular, we have realised that governance in itself cannot save the day when
controls fail, when auditors are not truly independent, when compensation and
appraisal systems drive short term goals or even provide incentives for poor or even
fraudulent behaviour and when accounting principles do not reflect economic
reality. It seems governance is not the 'Holy Grail' some thought it was. It is, as a
philosophy and a methodology, effective only when applied in conjunction with
other good management practices. The analysis of the essential interconnections
between governance and other systems (for example, accounting, reporting,
compensation systems) will be the field that the Institute will "plough" over the
coming years.
Having quickly abandoned the illusion of simplicity, Professor dr. Lutgart Van
den Berghe and her team built up their courage to tackle the issue of European
governance or, should we say, governance in Europe. Until the first conference on
the subject in the autumn of 2000, most, if not all, initiatives compared national
systems with a rather ambiguously defined 'Anglo-Saxon' approach. With the
European Union (EU) Commission's support, the Institute was proud to have
gathered 150 delegates from 17 countries at this conference.
This book tackles the issues of convergence and divergence in respect of
governance, the causes of this and related trends, from essentially an EU
perspective. The book's content development was greatly facilitated by our
conference delegates' appreciation of the theme and the Institute's approach to it.
It is claimed that the EU has more governance systems than the rest of the world
combined. The EU is a kaleidoscope of national and regional corporate legal
systems, languages and attitudes towards the role of business and governments.
Sadly, it is also a kaleidoscope of capital markets, risk capital environments and
stock exchanges. From this latter perspective but not necessarily from the others, we
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may wish that the EU governance systems would converge. However, scientists
must deal with reality and so must businessmen.
This book is about the reality of today and the position that we may expect in the
next foreseeablefuture.
Critical readers may draw comfort from Kenneth Clark: "Confident articles on
the future seem to me, intellectually, the most disreputable of all forms of public
utterance"1. I prefer the statement attributed to Mitterand by Jacques Séguéla (1996,
p. 158): "Il y a toujours un avenir pour ceux qui pensent à l'avenir". There is a future
for European governance but it will not be as simple we had hoped and it is, 'after
Enron', unlikely to be as American.
As chairman of the Institute, my thanks go to the staff of the Vlerick Leuven
Gent Management School where multidisciplinary attitudes prevail. I must also
thank Kluwer, and the many referees whom it contacted, for contributing valuable
insight. Finally, I must thank the Institute's members and participants in its events.
They support the Institute and see the EU as 'their home market', however imperfect
'the ever closer union' may still be.
Ultimately, this book is the fruitful result of a young and dedicated team of
academics, i.e. Professor dr. Christoph Van der Elst, Steven Carchon and Abigail
Levrau. Special acknowledgments are addressed to Professor dr. Lutgart Van den
Berghe who brilliantly led this team. She writes and teaches on governance and
serves on a number of MNC boards. Rather uniquely for a Belgian, she was named
most powerful woman of the Netherlands. In some respects at least, the EU is not a
vue de l'esprit.
This book will serve as the basis for our second European Conference on
governance issues, which will be held in Brussels on 27 and 28 November 2002. We
do hope that some new insights and renewed energy will come from it.
Louis-H. Verbeke
Chairman of the Belgian Directors' Institute
1 Cited by Barrow (1998), p. 232.
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