“A poorly conceived [corporate governance] system can wreak havoc on the economy by misallocating resources or failing to check opportunistic behaviors,” states Wharton management professor Mauro Guillen in his paper, “Corporate Governance and Globalization: Is There Convergence Across Countries?”
Corporate scandals, like the alleged executive greed and accounting improprieties at energy giant Enron, have thrust corporate governance practices into the spotlight, illustrating the fundamental role they play in any economy.
But does corporate governance operate the same way in any economy? That has been a point of contention among academics and economists. Guillen writes that proponents of the so-called globalization thesis argue that cross-national patterns of corporate governance are converging or will converge on either the Anglo-Saxon shareholder-centered model found in the U.S. and the U.K., or some hybrid between the shareholder and stakeholder models typically found in Japan and Germany.
The shareholder-centered model used in America includes dispersed ownership, strong legal protection for shareholders and indifference to other stakeholders. The hybrid model combines features from both the shareholder and stakeholder models, defined by a less clear separation between dispersed ownership and managerial control. In other words, stakeholders have more influence over the operation of the company.
These days scandals at Enron and the like have prompted economists to question whether other countries would really choose to follow a U.S. corporate governance model that has steered so many shareholders wrong.
It seems, scandals or not, that separate economies go about corporate governance in different ways, as Guillen concludes in his paper. “The question I ask myself and I try to answer is whether in different countries around the world the same sorts of practices regarding corporate governance are being adopted,” he says. “Even in these times of globalization where you have the expansion of markets throughout the world and more coordination by governments, different systems of corporate governance exist.”
In fact, globalization seems to encourage countries and firms to be different, to look for a distinctive way to make a dent in international competition rather than to converge on a best model, suggests Guillen. Good reasons can be found to explain why corporate governance strategies are different across countries, he notes. “The reasons have to do with the way in which firms are trying to compete in the global marketplace — more specifically the kinds of products and services [they offer], how much product differentiation they use and whether they are producing a lot of quantities at low cost,” Guillen explains
Take Korean auto manufacturers, for example. As companies that make a lot of standard-quality automobiles, their money-making strategy is to get big as fast as they can in order to sell more low-cost cars, says Guillen. They go about this by borrowing money quickly, often through bank loans. Consequently, their corporate governance structure is one in which the government, through banks, has influence over what goes on in the company, and the car maker has a say in government issues. That relationship influences Korean corporate governance.
French corporate governance is another prime example of the effectiveness of different strategies, notes Guillen. French corporations are often criticized for a governance approach that involves an intricate network of public agencies, large firms and banks. As a result, these companies excel at producing a specific type of product. “The French do certain things very well when it comes to products that require that kind of collaboration between government and business,” explains Guillen, noting that French-designed high-speed trains and nuclear reactors are among the best in the world.
“There’s a very important connection between corporate governance and the competitive strategy of firms,” he adds. “It’s not as simple as saying, ‘Oh, we’re going to change corporate governance so that we all have the same rules.’ The system of corporate governance interacts with many other things in an economy, such as the way labor laws are regulated, tax laws and bankruptcy legislation. If you change one component without changing the others, you’re essentially causing trouble.” His paper suggests that globalization is more about leveraging differences in an increasingly borderless world.
Guillen’s study, initiated more than two years ago, takes a macro approach to analyzing corporate governance worldwide. He analyzed six so-called empirical indicators to draw conclusions about global corporate governance in individual countries. These include the stock of foreign direct investment by firms under the influence of various corporate governance systems in their home countries, the presence of institutional investors in each country, the proportion of listed corporate equity held by different types of shareholders, the balance between debt and equity financing struck by non-financial firms, the adoption of long-term incentives in CEO remuneration, and the occurrence of hostile takeovers, which indicates the existence of a market for corporate control.
The globalization thesis, writes Guillen, argues that the spread of foreign multinationals will force a convergence of corporate governance models — largely on the shareholder-centered American model. Much of Guillen’s findings, however, refute that theory. For example, his analysis found that the proportion of the world’s stock of outward foreign investment, or foreign investment from different home countries, accounted for by the Anglo-Saxon countries is falling, from 66% in 1980 to just over 50% in 1997. Meanwhile, the combined shares of the countries influenced by the German, French or Scandinavian legal traditions have grown from 34% to 49% over the same time period. “It seems, therefore, that if there is convergence in corporate governance it may not be on the shareholder-centered model characteristic of the U.K or the U.S. but rather on some kind of hybrid,” says Guillen. What’s more, the actions of institutional investors, a look at hostile takeover activity and the role of banks as providers of funds to industry in these different countries also contradict the notion that corporate governance models are converging.
Perhaps the clearest indicator of non-convergence, Guillen suggests, is the market for corporate control. The shareholder-centered model, he writes, has traditionally been more susceptible to hostile takeover activity. Through the onset of globalization, the occurrence of hostile takeovers has largely been confined to Anglo-Saxon countries. Companies in the U.S. and U.K. alone accounted for 94% of worldwide hostile targets in terms of transaction value in 1980-1989, and 79% in 1990-1998. American and British acquirers were responsible for roughly 80% of worldwide hostile takeovers during the 1980s and 1990s. In September, Guillen and William Schneper, a PhD student at Wharton, completed a related paper entitled, “Corporate Governance Legitimacy and Models of the Firm: A Comparative Study of Hostile Takeovers.”
Corporate managers should not assume that the world, from the point of view of corporate governance, is becoming one big place, cautions Guillen. “If your company is expanding throughout the world, you still need to take into account those differences,” he says. “You can’t ignore them thinking that they will be going away. [Such an approach] is bound to fail.”