Global Convergence of Corporate Governance Codes - Literature review Example

Convergence of Corporate Governance Codes Name: Course: Institution: Tutor: Global Convergence of Corporate Governance Codes Introduction An important feature in the corporate governance environment during the last two decades has been the increasing call for harmonization of the mechanisms and systems relied upon for corporate governance. The global convergence of corporate governance requires spread and acceptance of certain regulatory norms, which are yet to be harmonized. However, some corporate governance practices have become increasingly common in many countries. These practices include separation of the roles of board chairman and chief executive, formation of board subcommittees and appointment of non-executive directors. This paper examines the forces behind global convergence of corporate governance standards and what that will mean for national standards. Forces for Global Convergence of Corporate Governance Codes The various corporate governance codes around the world have a striking similarity. This is, however, not surprising given that the various corporate governance codes are interrelated and influence each other in different ways. Though different in various dimensions, all these codes emphasize corporate transparency and accountability in reporting and independence of the governing bodies from management (Braithwaite & Drahos, 2000). More recently, most of the codes have evolved to include corporate social responsibility and strategic risk management. Most of these codes are published by international bodies such as OECD, the World Bank and the Common Wealth of Nations and clearly encourage convergence. Moreover, the various corporate governance practices and policies adopted by major global corporations encourage convergence. Regulation of security and financial transactions around the world are certainly converging. For instance, the International Organization of Securities Commission (IOSC), which enjoys the bulk of membership from the world’s security regulatory bodies, encourages convergence of codes. In fact, most members of IOSC have agreed to exchange vital information on unusual transactions. This will definitely make the activities of insider trading hazardous (Berger & Dore, 2001). The international accounting standards are also a major force for the convergence of corporate governance codes. Both the International Accounting Standards Committee and the International Auditing Practices Committee are tirelessly working towards global standardization and harmonization of financial auditing and reporting standards (Cuervo, 2002). Similarly, the United States’ General Accepted Accounting Principles are also moving towards that direction, though they are quite away from harmonization. In 2007, the United States Securities and Exchange Commission declared that US firms could adopt international accounting and auditing standards in lieu of the General Accepted Accounting Principles (GAAP). However, since American financial regulators and accountants are used to the rule-based regime of GAAP, adherence to the international standards will require judgment and not mere adherence to the international regulations (Bratislava Stock Exchange, 2002). Globalization is an equally important force behind convergence of corporate regulations into the international standards. Corporations that have a global outlook with a world wide service provision and distribution network will require international sources of finance. For most of these organizations, the move towards common governance standards is inevitable. The need to raise capital in foreign stock exchange markets is also a strong force in the move towards international convergence of corporate governance codes (Financial Reporting Council, 2003). Sourcing of capital from foreign investors will certainly encourage convergence since listing companies will be required to conform to the listing rules of the market in which they seek capital. Although it is the case that corporate governance requirements of different stock exchanges differ in detail, they are definitely moving towards common international standards. The apparent increase in cross border mergers between companies and stock exchange markets will have a major impact on country-centric corporate governance practices. This will definitely influence global convergence of corporate governance codes as evidenced by development of common platform for electronic trading of stocks (Bouton Committee, 2002). It has also been noted that research publications, professional journals and international conferences can also be significant contributors to the move towards harmonization and internationalization of global governance standards. Drawbacks to the International Convergence of Corporate Governance Codes Despite the efforts of numerous forces pushing for global convergence of corporate governance codes, there are several factors which seem to cause differentiations between countries, financial markets and jurisdictions (Cernat, 2004). For instance, legal differences in company law between countries as well as differences in contract and bankrupt laws between various jurisdictions will affect corporate governance laws. In the past, differences between the codified laws of Latin America, Japan, China and Continental Europe and the case law traditions of the United Kingdom, US and Common Wealth countries have greatly distinguished corporate governance practices and stand on the way of international convergence of these standards. Berger and Dore (2001) have noted that standards in legal processes can differ significantly. It is the case that some countries have weak and ineffective judicial systems. For these countries, court systems have limited powers and cannot be relied upon to resolve international conflicts. Moreover, not all judiciaries can be said to be independent of legislative influence. In many countries, developed and developing, political and state activities can be involved in jurisprudence and hence it can be difficult to exercise a favorable judgment of company cases. There are obvious differences in stock market capitalization and liquidity across the world. Obviously, financial markets exhibit great differences in their sophistication and scale of operation. These differences impact greatly on the governance practices and are reason corporate governance codes may not converge as in the near future (APB, 2002). Ownership structures vary significantly between countries with some country having a high concentration of family-based firms. Other countries are characterised by blocks of foreign investors while others have adopted leveraged chains, complex networks or pyramid structures. Together with culture, history and ethnic groupings, the differences in ownership structures have combined to produce different governance practices and board structures (Bratislava Stock Exchange, 2002). Conclusion The forces for global convergence of corporate governance practices and codes are ever growing in strength. At the most evident form of convergence, certain fundamental aspects have already emerged. These include the calls to separate corporate governance from management, responsibility to factor for strategic risks and the importance of corporate responsibility to stakeholders. These could certainly be widely adopted and promulgated across the globe. Nevertheless, a global harmonization and convergence of corporate governance codes and systems will require convergence of diverse corporate governance cultures, which is a difficult feat. References Auditing Practices Board 2002, Effective Communication Between Audit Committees and External Auditors, Briefing Paper, London, Auditing Practices Board. Berger, S and Dore, R 2001, National Diversity and Global Capitalism, Ithaca, New York, Cornell University Press. Bouton Committee 2002, Promoting Better Corporate Governance in Listed Companies, Paris, MEDEFF and AFEP-AGREF. Braithwaite, J and Drahos, P 2000, Global Business Regulation, Cambridge: Cambridge University Press. Bratislava Stock Exchange 2002, Corporate Governance Code (based on OECD Principles), Bratislava, Bratislava Stock Exchange. Cernat, L. (2004) The emerging European corporate governance model: Anglo-Saxon, Continental, or still the century of diversity? Journal of European Public Policy, 11(1), p. 147-166. Cuervo, A 2002, Corporate Governance Mechanisms: A plea for less code and more market control, Corporate Governance, 10(2), p. 84-93. Financial Reporting Council 2003, Combined Code on Corporate Governance, London, Financial Reporting Council. Read More