Is There Global Convergence in Corporate Governance - Essay Example

Convergence of Corporate Governance Table of Contents Introduction 3 Literature Background 3 Methodology 4 Research Question 4 Research Objectives 4 Rationale of the Study 4 Data Collection 4 Study 4 Result 6 Reference List 7 Introduction The corporate governance is defined as process and mechanism by which the organizational activities of a firm is directed and controlled. The practices of corporate governance is often varies across firms and different organization prefers to follow their own working procedure. Moreover, a definite trend of corporate governance practices may be seen based on the type of industry the firm is operating on. None the less it is quite intuitive that governance practices of different firms should vary among them. However, there has increasing evidence that the governance practices have stated to follow a converging pattern that leads to a unified trend which is followed by most of the organizations. This research paper is focused on convergence corporate governance practices among business firms and tries to determine the primary reason behind it. Literature Background Paul (2005) mentioned in his study that firms belonging to different cultural background follow different organizational practices. The cross cultural difference in organizational behaviour has been studies by Hofstede, Wedel and Steenkamp (2002), where he stated that people belonging to different cultural background possesses different psychological profile, which is the key determinant behind variance in governance structures in the organizations. However, Chan and Cheung (2012) contrasted that despite of the presence of cultural differences among the firms, there exists a uniformity among the corporate laws, which compels all the business firms to work under the same roof. Porta et al (1999) further added that the firms that operate in a multinational level deals with the financial standards and regulations of different countries. Therefore, it becomes a big hassle for them if different countries follow different standards. This as a result forced the multinational firms to agree upon a commonly used regulations and standards that eased the business activities of the firms. Coffee-Jr (1999) mentioned that the importance of protecting shareholder’s interests is also a vital determinant of the growing convergence of the corporate governance structures. This is mostly because the outside investors often face the risk of uncertainty in some countries where the expropriation of the minority shareholders by the controlling shareholders is extensive. Paul (2005) opined that the advent of globalization has created an open global business market where all the firms from different avenues perform their respective business activities. Therefore it is imperative that the firms follow a common business standard that makes it easier for them to commence business operations. Methodology Research Question Is there a global convergence among the corporate governance practices of the business firms? What are the determinants of the convergence of the governance practices? Research Objectives To find out if the corporate governance practices tend to converge in a global perspective. To evaluate the reasons behind the growing convergence in the corporate governance practices in a global perspective. Rationale of the Study This study will help readers to know how corporate governance practices are important in international business activities. The organizational activities often realign themselves to be compatible with the globally accepted practices. This study will highlight the factors that are responsible for following a unified governance practices among the multinational firms. Data Collection Data collection of a research work forms its foundation on which the study is being conducted. Data collection can be categorised on data types. Thus it can be primary data directly collected from the respondents of a statistical survey, or it can be secondary data, that is collected from sources like books or journals (Saunders, Lewis, Thornhill, 2009). This study has been conducted by a qualitative approach using secondary data collected from several journal articles. Study Enriques and Volpin (2007) mentioned in their studies that there is a major conflict of interest among the minor share holders and the dominating controlling shareholders. In order to mitigate this issue Berle and Means (1932) has stated that the there should be certain changes in the corporate regulations that separate the ownership of majority shares and its consequences. This scenario is quite different in case of European market. There most of the large firms possess a major share holder or are family owned; these individuals control the majority votes. This as a result leads to a centralized control and mostly follows the pyramidal ownership model. These two different scenarios suggest that there are significantly different consequences of the ownership structures of the firms. Enriques and Volpin (2007) suggested that countries should follow a common measure of ownership structure that will allow the firms to easily engage in cross boarder investments. The studies of Coffee-Jr, (1999) showed that the countries that follow a dispersed ownership can easily conduct business activities among themselves. This suggests that the countries are eventually trying to converge in to a commonly followed ownership models. Paul (2005) has pointed that the corporate governance practices in the light of accounting practices. He stated that accounting may be termed as a language of business. Therefore, if the firms commence their business activities by using a common language then it will be easier for them to make better communication and avoid any ambiguity. Therefore developing a set of international accounting standards that will be followed by the multinational firms, will help the organizations to easily commence financial calculation and translate balance sheets. For the purpose of achieving this, accounting practitioners suggested the use of GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards). The use of these accounting standards became largely popular and was adopted by several multinational firms. The American multinationals with overseas subsidiaries started to use U.S GAAP. Moreover, the firms that are associated with the international capital market have also started to adopt the U.S GAAP. This case suggests that the firms have successfully learned to communicate in a common language and have revolutionized the overseas business activities. Khanna, Kogan and Palepu (2006) mentioned that the rise of globalization plays an important role in the convergence of the governance practices. Globalization has lifted the trade barriers between several countries and created a more open global business market place. The concept of global convergence has highlighted the role of global capital that eliminates the inefficiencies of several governance practices. He has also mentioned in his study that there are several occasions where the shareholder oriented firms have failed to perform as expected. This as a result has created a realization among the firms that they need to follow a common governance standard. The convergence of organizational practices can be distinguished by type types, de jure and de facto. The de jure process is the convergence where the countries adopt similar governance practices among themselves. Conversely the de facto type is where the actual convergence of practices takes place. This suggests that even if the nations adopt each others’ governance practices but there may not be any actual codification. Therefore, the firms must ensure that they undergo proper implementation of the agreed governance standards to ensure long term business relationships and ease of overseas business activities. Result From the above articles it can be assessed that there is actually a growing convergence of global corporate governance practices. This is mainly because the organizations need to ascertain that they hold a compatible internal environment to pursue international business activities. The advent of globalization has opened up new window of opportunities where the firms can gain competitive advantages by making business collaborations or shifting their business operations to cross-border locations. These activities require the firms to focus on a common business language so that they can easily make communications and perform business activities. Moreover, following a common financial or accounting standard helps two different firms to make successful business collaboration and they can avoid any hassle of financial calculations occurring form different methods used by them. Thus it can be stated that the convergence of governance practices are mostly to ease off business activities and attract overseas investors. Reference List Berle, A, and Means, G., 1932. The Modern Corporation and Private Property. New York: Macmillan. Chan, A.W.H. and Cheung, H.Y., 2012. Cultural Dimensions, Ethical Sensitivity, and Corporate Governance. Journal of Business Ethics 110, pp. 45-59 Coffee-Jr, J.C., 1999. The Future as History: The Prospects for Global Convergence in Corporate Governance and its Implications. The Center for Law and Economic Studies. Pp.3-8. Enriques, L. and Volpin, P., 2007. Corporate Governance Reforms in Continental Europe. Journal of Economic Perspectives. 21(1), pp. 117-140 Hofstede, F. T., Wedel, M., and Steenkamp, J. B. E., 2002. Identifying spatial segments in international markets. Marketing Science, 21(2), pp. 160-177. Khanna, T., Kogan, J. and Palepu, K., 2006. Globalization and Similarities in Corporate Governance: A Cross-Country Analysis. The Review of Economics and Statistics,88(1), pp. 69-90. Paul, D., 2005. Impact of Globalization on International Accounting Harmonization. Academy of Economic Studies Bucharest. 4-5. Porta, R.L., Lopez-de-Silanes, F., Shleifer, A and Vishny, R., 1999., Investor protection and corporate governance. Journal of Financial Economics. 58 (2000), 3-27. Saunders, M, Lewis,P., Thornhill, A., 2009. Research Methods for Business Students. New Jersey: Financial Times Prentice Hall. Read More