Leveraging Differences in an Increasingly Borderless World

As the world continues to shrink and the global marketplace grows, corporations increasingly look beyond their home countries for best practices. Executives are less concerned about where the ideas for improvements originate than they are about how to adapt a particular best practice to their unique corporate culture. Given the dominance American firms have had in the marketplace over the past decade (indeed, over the past half century), one might think that companies throughout the world would be eager to adopt the American model of corporate governance as unquestionably the best practice paradigm.

Mauro F. Guillen, assistant professor of management at the Wharton School has found, however, that this is not the case. In fact, the opposite seems to be true, as he reports in a recent paper, "Corporate Governance and Globalization: Arguments and Evidence Against Convergence." He sees a trend toward distinctiveness rather than convergence: "globalization seems not to be about convergence to best practice, but rather about leveraging differences in an increasingly borderless world."

Multinationals are often seen to be homogenizing forces, creating cultures that extend beyond national boundaries. This tendency should in theory lay the groundwork for convergence. But Guillen argues that there are three factors working against convergence. First, corporate governance systems are embedded in complex webs of banking, labor, tax, and competition laws and regulations that are unique to each country and are unlikely to be modified in the near future. Second, corporate governance systems do not exist in isolation. They interact in complex ways with other institutional features that are tightly coupled with the strategies firms use to compete in the global economy. Third, convergence is unlikely because of political dynamics that are unique to each country.

We may speak of the desire to have one interconnected global economy, but different histories, cultures, and policies work against complete integration. Guillen notes how distinctive various cultures are: Japanese corporations tend to be more stable, while American companies tend to be more entrepreneurial. Guillen points out that Korea’s success has been due to its indigenous patterns of social organization and corporate governance that give rise to the large, capital intensive conglomerates known as chaebol. Taiwan, by contrast, spawns networks of family firms that have succeeded due to their adaptability and flexibility.

In addition to these cultural differences, each country has a unique system of laws that impact the governance structure of each corporation. Those laws reflect policies deemed important within each country. "Japan and Germany focused on the problems of stabilizing financial and commercial transactions between the firm and its creditors, suppliers and customers, while Britain and the U.S. evolved a system of corporate governance geared toward protecting individual shareholders against the exercise of managerial authority," notes Guillen.

Among newly industrialized countries in Asia, Latin America, and Southern Europe, the distribution of organizational forms and corporate governance systems has grown more diverse over time, contrary to what we might expect. Research by other scholars has shown that organizations and patterns of corporate control diverge as countries develop and become more embedded in the global economy.

Guillen argues that asking, "what is the best corporate governance model?" is an exercise in futility. There is none simply because too many other factors that are unique to the location of a company’s corporate headquarters work against convergence. "Countries develop corporate governance models that fit their legal traditions, social institutions, and development path," he concludes.

Even with the rapid internationalization of capital, a myriad of factors will militate against the homogenizing of globalization. We can look at the European Union as the ideal laboratory. Proponents of standardization have been lobbying for the past quarter-century to harmonize corporate governance standards, but with little success. "The evidence indicates that convergence will not result naturally from the creation of the single market, but rather from a concentrated political effort, if it ever takes place," he says.

Guillen has found that corporate governance does not matter – that no evidence exists tying corporate governance to financial outcomes. Whatever works best, works best. He concludes: "Globalization has made inroads over the last half century, suggesting that it encourages 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. In a global context, corporate governance must support what a country and its firms do best in the world economy." Companies may still seek to adopt best practices, but along with adoption comes adaptation of those practices to the unique culture that exists within different countries and different companies.

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