Does a Best Model Exist for Corporate Governance?Published: September 29, 1999 in Knowledge@Wharton
In their contribution to the forthcoming book Handbook of Strategy and Management, Gerald Davis, professor of organizational behavior and human resource management at the University of Michigan, and Michael Useem, professor of Management and director of the Center for Leadership and Change Management at the Wharton School, observe that a few thousand corporations produce the bulk of the world's economic output and employ a significant part of the world's labor force. This then leads them to ask the question, given that large corporations have such a profound impact on the economic well-being of society, is there a best model for corporate governance? If there is such a model, they then ask, can it be easily replicated in other societies and cultures?
They note that studies from researchers throughout the world have sought to examine and discern the dynamic relations that characterize corporate governance. Economic and financial decisions are embedded in a matrix that ties company directors, senior executives, shareholders, money managers, stock analysts, and government regulators. Given the right combination of features, that matrix can yield high investment returns and robust national growth. Given the wrong amalgam, it can lead instead to self-dealing, frozen form, and economic stagnation. Thus, the question of what is the best model for corporate governance is of no little importance.
The American model for corporate structure and governance is the one that most researchers might point to as the paradigm for the new millennium. After all, American businesses have been driving the world's economy for most of the past decade. But, Davis and Useem say, it was not all that long ago when the American system had been written off in favor of a hybrid of German and Japanese management practices and structures. The answer to the question of whether there is a "best practice" model of corporate governance appears to be more elusive than a first glance would otherwise indicate.
The term corporate governance often primarily brings to mind the chief executive officer of the company. Jack Welch at General Electric, Michael Eisner at Disney, Jurgen Schrempp at DaimlerChrysler all are the very personifications of their respective companies. But Davis and Useem argue that this is too facile. They observe that increasingly companies are working to develop a top management team. They note, for example, that prior to its merger with Travelers in 1998, Citibank had tapped its top 300 executives as its "corporate leverage population". And in expanding global corporations a top team's composition and culture affect company actions and results in ways that do not fit neatly into tidy frameworks.
Boards of directors are also critical players in the governance matrix. The professors find little consistency here as well, with boards organized in ways that reflect distinct cultures. They observe that boards of large publicly-traded companies in the U.S. range in size from four to 35 directors, with an average of 11 members. Boards in other countries average 12 members. But American boards tend to have far fewer insiders than boards in other countries. American boards typically have two or three insiders, while Japanese boards rarely have more than two outsiders. German and Dutch governance is built around a two-tier governance structure, with employees holding half of the upper-tier seats. British and Swiss governance is designed around a single-tier, management-dominated structure. Thus, practices differ even among those countries with the strongest and most tightly-linked economies.
Another major player in the governance matrix is the shareholder. Within the U.S. and the U.K., shareholders increasingly influence the direction of corporations run by professional managers. Davis and Useem point out, however, that outside these two countries even the largest businesses are typically owned by controlling shareholders. But, they note, "shareholder activism is beginning to achieve a global reach, partly through the actions of American institutional investors and partly through indigenous governance activism. Given the vast growth of U.S. institutional investment in equities outside the U.S., American-style investor activism is poised to go global." Powerful institutional shareholders and the ever-present threat of a takeover will both serve to increase the impact of shareholders in the governance matrix.
These are only a few of the complexities that Davis and Useem examine within the context of their overarching question: Is there evidence of convergence in management practice and corporate governance around the world? They believe the answer increasingly will be yes as a result of the inevitable forces of the global equity marketplace. "With companies seeking capital from all corners of the globe, investors predictably prefer relatively consistent models that they believe will optimize shareholder value and performance transparency." The road ahead is likely to see a greater focus on those governance arrangements and leadership styles that work well both within national settings and across cultural divides.
One factor that will be common in any context, they stress, is leadership: "Given the intensification of global competition and technological change in many markets, leadership is likely to make more of a difference in the future than it has in the past....Leadership within the company is a critical component. Unless the troops are mobilized and their mission understood, they are unlikely to deliver the value top management wants." Thus, irrespective of culture, location, and other factors, leadership will be critical to a company's success.
The "best practice model" is as yet unformed, if it indeed exists, but the path to convergence lies before us. Davis and Useem conclude, "We are more likely to discover a host of measures that, when deftly combined, adapted to legal contexts, and sensitive to cultural nuance, should produce what executives, directors, and stockholders, analysts, and regulators all want." The debate will continue, taking different forms as it takes place within various regions of our shrinking global marketplace.