International Corporate Governance - Coursework Example

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International Corporate Governance: Different Principles, One Goal Word Count (excluding footnotes and reference page): 3, 450 Introduction Corporate governance is defined as the mechanism by which organisations are governed and regulated.1 Contemporary profit-oriented organisations are regarded as public companies.2 This essay will discuss and compare the corporate governance system in the UK with the systems of the United States, China, and OECD countries, particularly Canada, in order to substantiate the argument that “regardless of what form of regulation, principles or prescription, the main aim of corporate governance should be the maximisation of shareholder value.”3 The corporate sectors of the US and UK are typified by a comparatively huge number of ‘quoted, a liquid capital market where ownership and control rights are traded frequently, and few inter-corporate equity holdings.’4 On the contrary, Japan’s and Germany’s corporate sectors are typified by a comparatively few ‘quoted companies, an illiquid capital market where ownership and control rights are traded infrequently, and many inter-corporate shareholdings.’5 Therefore, the corporate sectors of the US and UK have ‘outsider’ corporate governance system, whereas the corporate governance systems of Japan and Germany are ‘insider’ ones.6 The corporate sector of Australia has previously been regarded to hold the same core features as those of the United States and the United Kingdom.7 These issues will be discussed thoroughly in the later sections. The goal of corporate governance, which offers guidelines to direct the decisions and responses of the board and management, has been widely agreed to be concentrated on ‘enhancing corporate profit and shareholder gain.’8 Quite frequently this is understood as ‘maximising shareholder value,’9 and quite frequently as well can be understood as allowing profit and advantage today to the detriment of profit and advantage in the future. Indeed, temporary shareholder profit and corporate advantage is simpler to determine and easier to integrate in corporate decision making and could even be reasonable to quick fix or temporary shareholders.10 However, an exclusively short-range focus may result in inadequate ventures in training and innovation, for instance, so that potential competitive advantage is risked, to the absolute loss of the shareholders.11 Due to these grounds, defining the corporate objective only in relation to ‘maximising shareholder value’ is not enough. A more adequate way to define the corporate objective is ‘maximising wealth creating potential.’12 This is tantamount to sustaining the company for the gain of every shareholder by pursuing actual long-term economic growth. Theorising Corporate Governance Two major features of present-day companies are the distribution of equity among shareholders, and the separation of control and ownership.13 The concept of agency cost is defined by Jensen and Meckling (1976) as the ‘sum of (1) the monitoring expenditures of the principal, (2) the bonding expenditures by the agent, and (3) the residual loss.’14 Agency costs, more particularly, may comprise the direct losses of advantages or assets and/or expropriation because of managerial ineptitude or lenience.15 Management, as argued by Shleifer and Vishny (1997), can carry out asset expropriation in a variety of ways, such as directly pilfering wealth from the accounts of the company, transferring the assets of the company through ‘subjective’ pricing to their own companies, or trading valuable company resources to their own companies at low prices.16 However, management lenience could be the more unfavourable kind of agency cost. Management may boost their purchase of luxuries at the expense of the company, or raise their position by enlarging the company’s size even though the expansion is not justified on competence bases.17 The direct expropriation of a company’s resources is widespread in a large number of transitional economies and developing nations, where legal institutions are unstable or in an undeveloped status.18 However, in economies with stronger legal foundations where appropriation of assets can result in serious penalties, the overindulgence and ineptitude of the management has become the emphasis of scholarly/theoretical works and policy development.19 To alleviate agency cost, an apparent solution is to enhance management shareholding, placing the manager in the position of a major ‘residual claimant’.20 Managers, as argued by Jensen and Meckling (1976), perform better, the higher the stake of their ownership within the company.21 They argue that managers desire to carry out plans or use projects that satisfy their personal interests. The argument is that, basically, with a greater percentage of shares to spare, the manager may exert extra effort to enhance the performance of and outcomes for the company, which results in a boost in firm value and thus his/her personal assets. Agency cost is absent when management possesses all the equity.22 Morck and colleagues (1988) have empirically discovered an inverse correlation between agency costs and the shareholdings of managers.23 All the aforementioned studies views corporate outcomes as reliant on ownership structure. Several other studies, such as Fama and Jensen’s (1983), claims that ownership structure is internally established in stability, and that shareholders may choose the ownership structure alongside most favourable market value of the company.24 While recognising the descriptive strength of these studies, their assumption is not actually valid in China where institutional shares are prohibited to be openly traded.25 Basically, institutional shareholders cannot buy shares when the outcomes for companies are good, or sell when it is poor.26 Studies of the relationship between corporate performance and ownership structure will not be valid or reliable unless a certain group of investors or shareholders are regarded openly in the analysis.27 More importantly, in order to understand the core objective of corporate governance, which is to ‘maximise shareholder value’, this essay will compare the corporate governance systems of the UK, US, China, and OECD countries in the next section. Comparing Corporate Governance in the UK, US, China, and OECD Countries The systems of corporate governance in the UK, US, and OECD countries, particularly Canada, are all seeking to attain similar objectives with the codes of their corporate governance, specifically, to guarantee that managers act in the best interest of the shareholders, in place of their personal interests, and to enable monitoring of shareholders of listed companies’ behaviours.28 There are obvious differences in each cluster of listing policies. Possibly the most apparent distinction is that the United States obliges conformity to its corporate governance policies, although the United Kingdom and several OECD countries, such as Canada and Australia, merely oblige transparency of the governance rules of companies.29 In addition, there are varying specificity degrees in each group of corporate governance rules—questionably, the policies of the United States are the most permitting, whilst the rules of some OECD countries enclose the utmost specificity level.30 Differences in each policies of exchange can simply be valued in the perspective of the varying cultural, economic, and social contexts where in they were formed. The corporate governance systems of the US, UK, and OECD countries are only one unit of a bigger system of corporate governance machineries within the Anglo-American practices.31 The interaction between these units, for instance, between a stock exchange and the courts, will counteract the deficiencies in each independent institution and will reinforce the efficiency of the mechanism of corporate governance policy altogether.32 This efficiency may be weakened in the UK markets for there will be diminished interplay between monitors of corporate governance now that the London Stock Exchange (LSE) has given up its listing duties.33 In due course, this may unfavourably affect LSE listed companies’ corporate governance. Institutional History There are features of the history of stock exchange institutions of the US and the UK that may justify their distinct corporate governance rules. Even though the US and UK stock exchange institutions were not remarkably particular in creating listing obligations for firms in the 1800s, the US and UK stock exchange institutions became more choosy later on as the requirement for listings expanded.34 At this point, the UK applied company size as its primary standard for selection; nevertheless, the UK would list smaller firms that did not meet the least capital conditions if there was a securities demand.35 The US enforced more burdensome restrictions on its claimants and was less prone to loosen up these restrictions than the UK.36 The United States also only allowed the listing of firms in particular forms of industries. The US started to enforce compulsory transparency rules on all listed firms in the 1900s, and compulsory policies of corporate governance, like the mandatory annual meeting of shareholders, originated from these transparency rules.37 In that case, it is probable that the compulsory norms of corporate governance were more willingly recognised by the listed companies of New York Stock Exchange (NYSE) originally due to the enlarged need of NYSE listing and consequently due to the opposition of the exchange to loosen up its more rigid conditions.38 Hence, the historical development of the stock exchange institutions of the US and the UK presents important ideas of the context of their corporate governance policies.39 Later developments at the UK and other OECD countries may additionally explain these exchanges’ appeal to lenient policies complemented by a compulsory transparency duty.40 In 1991, the Cadbury Committee was formed in the UK to deal with deficiencies in particular features of corporate governance of companies in the UK that were broadly ascribed to a number of prominent corporate letdowns.41 Even though these corporate letdowns suggested that listed firms in the UK and other OECD countries, such as Canada and Australia, needed further direction on corporate governance, these countries had a governance institution that functioned as groundwork for proposals of each committee.42 In the UK, for example, legal pre-emptive rights functions as an effective monitor on self-centred behaviour since the management of a company is aware that it should consult its existing shareholders prior to engaging in the market when it wants extra funding.43 The US did not have the same groundwork and enforced the initial conditions of its corporate governance at a period when other systems of governance, like national corporate statute, were recently starting to grow.44 The committees in the UK and Canada perhaps viewed lenient policies adequate because these policies enhanced the current corporate governance context in these countries. The enforcement of a compulsory transparency duty also enhances these institutionalised corporate governance policies by enabling institutional checking of a firm’s governance procedures.45 Hence, the historical development of governance policies in the US, UK, and OECD countries reveals several of the causes of their present-day structure. Differences in Structure There are advantages and disadvantages of implementing a mandatory system in place of lenient, governance policies. Binding guidelines create specific baseline criteria that firms should sustain, and hence, the guidelines offer a minimum degree of security for complacent or simple shareholders.46 Compulsory guidelines should be adequately explained in order for firms to know how to apply them; nonetheless, firms may not attain the most favourable governance techniques if compulsory guidelines are quite regulatory that they limit all forms of trialling.47 The NYSE mitigated several of these unfavourable impacts by creating facilitating policies that involve a minimum number of inclusive obligations of governance.48 Hence, the Manual of NYSE facilitates a firm to try out new corporate governance systems provided that the firm meets the baseline policies of NYSE.49 Moreover, there is proof that the corporate governance policies of NYSE are not too stringent although they are more complete than those enclosed in the Code or the Manual of Toronto Stock Exchange (TSE).50 Not like the TSE, for example, the NYSE obliges all members of the audit committee to be ‘financially learned’.51 Yet, the guidelines of NYSE do not delineate ‘financial literacy.’52 The guidelines of NYSE offer firms with a certain level of flexibility to adjust specific governance codes to their requirements, but also may baffle the officials and managers of listed firms on the issue of whether or not they are completely meeting the guidelines.53 However, another case of the facilitating guidelines of NYSE involves associated party dealings. The NYSE previously allows dealings between a firm and one of its constituents but enforced stringent restrictions on the length of the transaction.54 The NYSE, in 1984, modified this procedure, and at present NYSE Manual’s Rule 307 promotes, but does not oblige, audit committee of companies to evaluate associated party dealings for unfairness.55 This guideline introduces a process for assessing these dealings, but facilitates each listed firm to create its own monitoring and review system.56 Thus, although several of the guidelines of NYSE perhaps necessitate further explanation, its binding policies try to guarantee that each firm has a flexibility level to tailor its governance system within the boundaries of specific minimum prerequisites.57 There are costs and benefits to a mechanism of lenient corporate governance rules that is accompanied with transparency accountability. Lenient policies offer firms with more liberty than obligatory policies to organise their corporate governance processes.58 This is beneficial because no governance framework fits the requirements of every listed firm. One drawback of non-compulsory policies is that they could sustain weak corporate governance since firms are not allowed to adjust their governance procedures.59 The Financial Services Authority (FSA) and TSE alleviate these unfavourable impacts by integrating lenient guidelines with a compulsory disclosure duty.60 Transparency allows existing shareholders to check the behaviour of the management and to wield pressure on officials and managers, when needed, to modify defective governance practices and systems.61 Officials and managers may assess the possible effect of governance actions more seriously before deviation from an exchange’s policies due to this heightened public inspection. The effectiveness of this strategy rests, partly, on a dynamic shareholder foundation that is eager to assume accountability for scrutinising companies’ conformity to the guidelines, and this is not true for a large number of listed firms.62 Hence, neither obligatory substantive guidelines nor disclosure-focused policies present a completely adequate process for normalising corporate governance. Diverse preferences in this respect by the FSA, the LSE, the TSE, and the NYSE, should have stemmed from other variables, particularly, the distinct cultural, economic, and social forces existing in each market.63 Basically, good corporate governance involves a group of processes to guarantee that shareholders acquire a sufficient return on their investment. China, just like the other countries discussed above, is no exception.64 Concerning financial transparency or disclosure, majority of listed firms in China are monitored by local accounting agencies; however, no truthful information is available to identify which accounting agencies are more trustworthy.65 Nevertheless, ‘companies that issue H shares, which are traded on the Hong Kong Stock Exchange or B shares, which are open mainly to foreign investors in domestic stock exchanges,’66 should implement or use international accounting criteria. Meanwhile, a dynamic market for corporate governance is regarded to be crucial for effective resource allocation. This market permits competent directors or managers to acquire adequate shares to take out incompetent managers.67 Substitute competitions are not generally successful in toppling the current board of directors or management due to the fact that shareholdings are usually scattered among small investors.68 Harmonious takeovers and mergers take place in all countries and comprise majority of the dealings in the market for corporate governance. In highly industrialised countries, the fraction of these operations ‘ranges from 60% to 90%.’69 Unfriendly mergers and takeovers take place quite often in the United Kingdom and the United States, but a lot less in Japan, France, and Germany.70 A number of studies imply that takeovers boost considerably target companies’ market value, even though the advantage for bidding companies is nil and perhaps even negative. Yet, in China, there is no active corporate control.71 Large shareholders aside from the largest one are hindrances to channelling operations by the largest shareholder since these shareholders have reasons to scrutinise and control the largest shareholder.72 Market efficiency for corporate governance is reinforced as these large shareholders can instigate a competition for corporate domination or aid an outsider’s struggle for domination when the current management poorly performs.73 These large shareholders, as well, have the privilege to directly scrutinise the management. In relation to the general legal setting, another major external system, firms that have issued ‘H shares or B shares’ 74 are contained within more rigid legal guidelines. The government is probable to have objectives other than maximisation of shareholder value, like preserving social stability and employment security.75 In sum, as demonstrated in the above discussion, an influential government stakeholder in the UK, US, China, and OECD countries, can make use of the listed firm as a means to attain these other policy objectives although they may contradict the interests of shareholders. Conclusions The stock exchange institutions of United Kingdom, United States, China, and OECD countries have considerably influenced the governance procedures of the major, locally integrated firms listed on each exchange; they are also the appropriate controllers of corporate governance system in the Anglo-American society. The stock exchange institutions have the adaptability and capability to deal with problems of corporate governance as they emerge. The disadvantages of a regulation based on the market system, particularly partiality and the failure to force implementation, are lessened by the existence of the self-regulatory mechanism. The stock exchange institutions of the US, UK, China, and OECD countries, control corporate governance in their own way, and these differences can be ascribed to the distinct cultural, economic, and social circumstances in the aforementioned countries. Structural preferences for listing policies of corporate governance were affected by historical events and are exposed to different institutional restrictions. Differences in culture, like the existing laid-back approach in the US76, and the undisclosed but courteous culture in the UK, have influenced this mechanism as well. Furthermore, the failure of the stock exchange institutions in some OECD countries, such as Canada, to sufficiently deal with the absence of a firm culture of corporate governance may clarify the reason listed firms have not attained absolute conformity to the transparency policy. The governance norms embraced in the listing rules of various exchanges and the Code reinforce the strong points and limitations of other monitoring mechanism of corporate governance in each country. The corporate governance policies of the US work in collaboration with existing institutional shareholders, established courts, and state law regulation.77 The listing rules in some OECD countries are reinforced by implementation of the fiduciary obligations of managers through the domination solution as well as scrutinising prevailing institutional investors, such as shareholders. Preventive rights and personal demands from institutional investors function as supplementary monitors on the UK market.78 These protections have also affected the system and success of the listing policies of corporate governance. Moreover, numerous of the believed detrimental impacts of demutualisation did not turn up for exchanges that have transformed into profit-oriented firms, such as that of Canada.79 One explanation for this is that exchanges have enforced necessary protections to lessen partiality and to safeguard themselves from the pressure of leading investors. Furthermore, exchanges have carried out programmes to make sure that they will refrain from cross-subsidising their profit-oriented operations with resources obtained from their monitoring or governing services.80 Furthermore, demutualisation offers a large number of advantages to an exchange and has the ability to improve its omission of corporate governance, specifically by enabling more drastic decision-making under shifting circumstances.81 Hence, the UK lost an important monitor of corporate governance when the Financial Service Authority took over the listing duties of the LSE and stripped the UK markets of the advantages of a self-regulatory mechanism.82 Certainly, these markets would be more well-positioned if the LSE had implemented a framework identical to some stock exchange institutions, such as that of Canada’s, upon demutualisation.83 Albeit its markets are working within a distinct cultural, economic, and social context, the stock exchange institution of the United States can acquire much knowledge from the experiences of exchanges in the UK, China, and other OECD countries, and should be capable of continuing the monitoring of corporate governance of listed firms. 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