Corporate Governance

Corporate Governance

Introduction

The quest for persuasive theory and evidence on societal convergence has a long and tortuous history punctuated by bold promises and great disappointments. The staged transitions of modernization theory, the all-encompassing worldview of structural functionalism, and the determinist musings of historical materialism succumbed with the disassembly caused by the economic turmoil of the 1970s and the end of the cold war in 1989. But as soon as sociological theories of convergence were replaced by more nuanced institutional approaches, economic theories of convergence swiftly gained prominence.

The 'globalization of markets thesis' is perhaps the most pervasive and influential convergence theory nowadays. Among many others, the argument is made that countries ought to abandon their idiosyncratic corporate governance systems and converge on the much more efficient Anglo-Saxon, capital-market driven model if they are to succeed in this most competitive global economy.

Early students of corporate governance argued that shareholder rights and the sharp separation of (dispersed) ownership from (managerial) control were inevitably more 'efficient' and 'modern' than alternative models such as those underpinning family firms, conglomerates, bank-led groups or worker cooperatives, and would accordingly become widespread (Berle and Means 1932; Kerr et al. 1964). These models developed historically in the United Kingdom and the United States, the two dominant world powers of the 19th and 20th centuries. In particular, given the dominance of American business from the end of World War II to at least the 1970s, one would have expected the American corporate governance model- dispersed ownership, strong legal protection of shareholders and indifference to other stakeholders, little reliance on bank finance, relative freedom to merge or acquire- to have been adopted as the best practice throughout the world. The rise of Germany and Japan as formidable manufacturing powers from the 1960s to the 80s, however, cast serious doubt on the superiority of the American model of corporate governance (Gerlach 1992; Kester 1996).

Both U.S and UK capital markets have widely dispersed share ownership in contrast to concentrated shareholdings predominant in Europe and many developing countries. Ownership patterns fundamentally influence the way in which policymakers approach corporate governance and the management of potential conflicts of interests between ownership and control - the 'Principal / Agency' problem.

Principal / Agency problem

In countries with widely dispersed shareholding the 'Principal / Agency' problem concerns potential conflicts arising between the owners of companies (as 'Principals') and boards of directors who have effective control over companies (as 'Agents') and may allow self-interest to influence decision making.

Majority shareholders vs minority shareholders

Countries with more concentrated ownership structures often have majority shareholders who significantly influence the board. Consequently, an 'agency' conflict arises between controlling 'majority' shareholders who may extract private benefits at the expense of minority owners.

Protecting shareholder rights

Corporate governance aims to protect shareholder rights, enhance disclosure and transparency, facilitate effective functioning of the board and provide an efficient legal and regulatory enforcement framework. It addresses the 'Principal / Agency' problem through a mix of company law, stock exchange listing rules and self-regulatory codes.

Corporate governance in Europe

There is no 'one size ...