A more realistic global perspective than the convergence thesis is that there will continue to be considerable diversity both in the forms of corporate governance around the world. Different traditions, values, and objectives will undoubtedly continue to produce different outcomes in governance, which will relate closely to the choices and preferences people exercise in engaging in business activity. If there is convergence of corporate governance, it could be to a variety of different forms, and it is likely there will be divergence away from the shareholder oriented Anglo-American model, as there will be convergence towards it.
A surprising claim of Thomson (2003) is that as US and UK board structures adopt more actively a committee structure with subcommittees of independent outsiders for the key committees of remuneration, auditing, and nomination, which the SEC and NYSE insist upon in the US and which is a central part of the Combined Code in the UK, there are elements of a two tier system of control, which is also implicit in the full separation of the CEO’s and chairman’s role. Certainly boards of directors in the US and UK in recent years have felt a more immediate responsibility to recognize a wider range of relevant constituencies as stakeholder perspectives have once again become a more prominent part of corporate life. In US firms the spread of equity based compensation, recognition of the growing importance of intellectual capital, and the adoption of high performance work practices have all reemphasized the importance of human capital in a context where previously labor was marginalizes in the interests of a single minded shareholder ethos. It is ironic that as European and Japanese listed corporations are being forced to recognize the importance of shareholder value Anglo-American corporations are being sharply reminded of their social responsibilities.
Thomson, citing Gerald Davies, illustrates the transition from a shareholder to a stakeholder view with the symbolic change in rhetoric of the Coca-Cola Company. In an earlier mission statement, Coca-Cola declares:
At the Coca-Cola Company our publicly stated mission is to create value over time for the owners of our business. In fact, in our society, that is the mission of any business: to create value for its owners.
On the other hand, in a more recent statement its president announces:
Fundamentally, the Coca-Cola company, is built on a deep and abiding relationship of trust between it and all its constituents: bottlers, customers, shareowner's, employees, suppliers, and the very communities of which successful companies are an integral part. That trust must be nurtured and maintained on a daily basis.
The widespread adoption among leading Anglo-American corporations of triple bottom line reporting, publishing social and environmental reports alongside their financial reports, and actively demonstrating their corporate social responsibility in other more practical ways suggests this is more than simply a rhetorical change. The formal adoption of enlightened shareholder value in the UK Companies Act indicates a significant move forwards from the more naked pursuit of shareholder value. Further unlikely, but nonetheless real, evidence that the United States system could in some important ways converging towards the European model is unearthed by Thomson (2003). Firstly an unanticipated consequence of the increasing use of executive stock options in the US has caused a degree of reintegration of ownership and control. Holder ness, Kroszner, and Sheehan (1999) compared a comprehensive cross-section of 1, 500 publicly traded US firms in 1935 with a modern benchmark of more than 4, 200 exchange listed firms for 1995. They discovered that the percentage of common stock held by a firm’s officers and directors as a group rose from 13% in 1935 to 21% in 1995. This is partly attributable to the entry into the market of new firms with high ownership concentration (for example in high tech start ups), and the exit of old economy firms with dispersed ownership due to merger and acquisitions. Denis and Sarin (1999) find average CEO ownership of 7. 2% for a random sample of listed firms. Mehran (1995) examined the ownership of outside block holders in the US, which he classified as individuals or entities owning at least 5% of total stock (as this triggers a mandatory SEC filing). He discovered that 56% of randomly selected manufacturing firms had outside block holders (23% were individuals, 23% other corporations, and 54% institutions).
This pattern of insider ownership and extensive block holding in the US does not demarcate the American system as sharply from the European as is often suggested. And the trend may be in this direction as apparently the stock market in Anglo- American systems responds positively to higher ownership by financial institutions (one reason for this may be the perception of better monitoring) The increasing importance of institutional investors in the US, and in every other market, means that ownership relations are once again becoming more concentrated (even if the ultimate beneficiaries are highly diffuse). This institutional ownership has begun to create forms of relational investing, which could over time lead to more exercise of voice and less of exit by US shareholders. Finally the return of block holding in the US may be enabled by US banking deregulation and the abolition of the Glass Seagull Act and Bank Holding Company Act, which over the longer term could enable US banks to play a more active role in investment banking and corporate governance as in the European system. As US banks grow larger they would be able to take positions in individual firms without incurring excessive risk. Much attention has been focused upon the pressures driving large listed German corporations to focus more directly on the creation of shareholder value, and upon the insistent pressures for Japanese corporations to demonstrate more transparency and disclosure. Less attention has been paid to the developing pressures upon Anglo-American corporations to exercise greater accountability towards institutional investors and more responsibility in relation to their stakeholder communities.
With multiple institutions exerting interdependent effects on firm level outcomes, and with different values informing the objectives for the enterprise in different cultures (Hofstede), the scenario for convergence and diversity of corporate governance models is more complex and unpredictable than many commentators have suggested. A pioneer of corporate governance possessed a more compelling grasp of the possibilities that convergence and divergence may occur simultaneously: that is an insistent increase in diversity within an overall trend towards convergence.
Looking ahead towards the next decade it is possible to foresee a duality in the developing scenarios. On the one hand, we might expect further diversity new patterns of ownership, new forms of group structure, new types of strategic alliance, leading to yet more alternative approaches to corporate governance. More flexible and adaptive organizational arrangements, entities created for specific projects, business ventures and task forces are likely to compound the diversity. Sharper differentiation of the various corporate governance types and the different bases for governance power will be necessary to increase the effectiveness of governance and enable the regulatory processes to respond to reality. But on the other hand, we might expect a convergence of governance processes as large corporations operating globally, their shares traded through global financial markets, are faced with increasing regulatory convergence in company law, disclosure requirements and international accounting standards, insider trading and securities trading rules, and the exchange of information between the major regulatory bodies around the world.
In this analysis the strength of diversity rather than uniformity becomes apparent:
There is then value in maintaining international diversity in corporate governance systems, so that we do not foreclose future alternatives and evolutionary possibilities. The argument resembles the argument for bio diversity in species. (McDonnell 2002).
The importance of diversity for the exercise of choice and creativity is paramount, and reveals the dangers involved in national and international policymaking vigorously advocating a one-size-fits-all prescription for corporate governance. Indeed this essential dynamism of corporate governance was fully recognized in the OECD Business Advisory Group’s report:
Entrepreneurs, investors and corporations need the flexibility to craft governance arrangements that are responsive to unique business contexts so that corporations can respond to incessant changes in technologies, competition, optimal firm organization and vertical networking patterns. A market for governance arrangements should be permitted so that these arrangements that can attract investors and other resource contributors and support competitive corporations flourish. To obtain governance diversity, economic regulations, stock exchange rules and corporate law should support a range of ownership and governance forms. Over time, availability of “off-the-shelf” solutions will offer benefits of market familiarity and learning, judicial enforceability and predictability.
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