Corporate Governance in Gulf Countries - Three Empirical Analysis - Literature review Example

? Corporate Governance in Gulf Countries: Three Empirical Analyses (PhD) Table of Contents Table of Contents 2 Literature Review 3 Approaches to Corporate Governance 3 Corporate Governance in the Anglo Saxon Countries 4 Comparative Analysis of Corporate Governance in Anglo Saxon and Gulf Countries 6 Convergence of Corporate Governance Practices In Europe 7 History of Corporate Governance in US, UK, Germany, France and Japan 8 Corporate Governance in UK 9 Corporate Governance in US 10 Corporate Governance in France 11 Corporate Governance in Germany 11 Corporate Governance in Japan 12 References 14 Bibliography 17 Literature Review Approaches to Corporate Governance In an article termed “Shareholder vs. Stakeholder: Two Approaches to Corporate Governance” by Garcia (2008) the two distinct approaches to corporate governance have been discussed. The investors from outside namely the shareholders are provided prominence in countries which have “Anglo Saxon legal tradition”. Examples of such countries are the US, the UK, Australia and Canada. Since compensation is tied with profitability in the US the companies often cut on their labour to sustain profitability. Thus, employees do not trust the top management in such countries. In Germany and Japan, job security of employees is a prime corporate objective since the stakeholders are provided a lot of importance. A co-determination governance system is used in Germany by the top management to ensure internalisation of employee welfare. The article highlight certain ‘mutually reinforcing institutional elements’ namely accountability, transparency, board of directors, disclosure, legal systems, personnel turnover, stock in the capital market, unionisation, personnel turnover, the separation of the CEO and the chair, hostile takeovers and labour market flexibility. The authors state that corporate governance can be explained by two models namely outsider or shareholder centred view and insider or stakeholder centred view. Transactional interaction is seen in the outsider model and this model emphasises on the ability of the capital and the labour market to allocate resources effectively. This model stresses on external control systems. In the insider model, interactions are based on informal and formal rules. The corporate governance models that help in classifying countries are the Anglo Saxon model, German model, Scandinavian model and French model. The Anglo Saxon countries have a shareholder centred model of corporate governance while German and Austrian companies have a stakeholder orientation. The author states that employees are the most important stakeholder. The companies belonging to different countries have different approaches to corporate governance although they face the same kind of problems (Garcia, 2008). Corporate Governance in the Anglo Saxon Countries A study on changing corporate governance practices in Europe has been made in a research paper named “European Corporate Governance: A Changing Landscape?” by Carriere (2002). The investment and corporate community of Europe consider the UK capital market to be ideal. The regulations in relation to the securities market in UK are similar to the rest of Europe. Insider trading violations are criminal offense and not civil offense in UK and the rest of Europe. UK corporate officers do not have to face any loss of money or bear any risk due to breach of their fiduciary duty. Tax laws pertaining to capital gains and corporate compensation are similar in continental Europe and UK. Similarity also exists in terms of government law enforcement. In the US, the Securities and Exchange Commission (SEC) look after the activities of the exchanges. In contrast, the exchanges are themselves responsible for their activities. The Financial Services Agency (FSA) established in 2001 was entrusted with keeping a watch on the exchanges. The rules enforced by the EU contribute to various changes in corporate governance in Europe. A directive was issued by the EU for IAS implementation for all the member countries of the EU by 2005. The parameters of IAS obligate certain reporting that may not be in the best interest of shareholders. Companies are not permitted to keep two different types of accounting books which are mainly for the markets and for the government tax authorities. Thus, shareholders may be placed in a disadvantageous situation whereby CEOs may have the motivation to pay the least amount in taxes rather than booking the maximum profits for shareholders. A large number of policies are implemented by EU. A close association between Assogestioni and Italian Borsa Management was developed to make the hostile takeovers easier in Italy through the enforcement of various laws. In contrast, hostile takeover laws in Germany are restrictive and disclosure of insider trading is almost non-existent. The recent trends that are being seen in the European continent reflect a shift towards the Anglo Saxon model in corporate disclosures and also in terms of structure of the capital market. Differences exist in the accounting standards of the UK, the US and other continental countries. A merger of Amsterdam, Paris and Brussels stock exchanges resulted in the Euronext. The French companies which are listed on Euronext have poor accounting standards in comparison to Dutch accounting standards. Quarterly and semi-annual reporting is not required in French companies. “Retroactive adjustments to earnings announcements” is permissible in Germany but forbidden in Holland and London. The principle-agent problem of equity finance is solved through the evolution of large investors who are able to channelize the investments of various small investors. Diversification strategy enables the institutional investors to obtain a significant shareholding that allows them to exert their rights and monitor the managers without infringing on the rights of the minority shareholders. The increasing prominence of equity holdings of institutional investors both in continental Europe and the Anglo Saxon countries resulted in the emergence of a new corporate governance model. The rigid distinction between the “Anglo Saxon Paradigm” and “The Continental Paradigm” was reduced through the emergence of the new model. A corporate governance code has been issued in almost every European country. Certain changing trends of corporate governance are visible across the European countries. The European CEOs are experiencing more power than the other members of the board. A shift towards the US style is being observed. The boards are experiencing greater independence and becoming more accountable. Five fundamental principles were adopted by OECD ministers in the international standard of corporate governance that was produced in 1999. These principles are a part of twelve international financial stability standards in addition to IAS and Basel Accords. Benchmarking corporate governance practices with international standards is considered essential. The three models of control existent in Europe are corporative model, shareholder value model and predator model (Carriere, 2002). Comparative Analysis of Corporate Governance in Anglo Saxon and Gulf Countries Corporate Governance in Anglo Saxon Countries Corporate Governance in Gulf Countries Anglo Saxon countries have a majority of publicly listed companies which makes adoption of effective corporate governance practices easier. Ownership patterns determine corporate governance in a region. In the gulf countries, most of the businesses are family owned and state owned. Thus, it is difficult to establish effective corporate governance practices. Greater transparency and accountability is seen in these countries. The rights of shareholders are considered. Accountability of the management and the board towards the shareholders is recognised. The gulf countries still need to bring in better accountability and transparency. The state owned enterprises need to allow voting rights to shareholders, include them in the decision making process and freedom of information. There is a greater need to enforce regulations prohibiting insider trading and corruptive practices. Regulations protecting the foreign and minority shareholders should be put in place. Convergence of Corporate Governance Practices In Europe In a research paper “The Europeanization of Corporate Governance in Germany and The UK” discusses about the corporate governance practices in Germany and the UK. Companies in Germany are considered as social institutions where the interests of the various stakeholders are balanced. The companies are characterised by concentrated ownership and cross shareholding facilitates stability of control and codetermination system that allows employee representatives representation in supervisory board. Shareholders are provided primacy. The EU rules that the UK and Germany have to face do not fit with their corporate governance system. There is a conflict between the EU rule and corporate governance in the UK. The consultation and information rights of employees are against the objective of maximizing shareholder value. The takeover code of Germany in 1995 represents a mild adjustment towards the EU proposals. The EU rules are demanding convergence of corporate governance practices of the UK and Germany with the rest of Europe. This has resulted in the adoption of a central Anglo-Saxon principle (Waddington, 2004). History of Corporate Governance in US, UK, Germany, France and Japan In a research paper “Corporate Governance: History without Historians” by Herrigel (2006) deals with the historical progression of corporate governance namely in United States, Germany, Britain, France, Japan. The paper analyses the diachronic and synchronic variations in corporate governance across the various countries. The corporate governance of these countries is characterised by either ‘concentrated ownership’ or ‘dispersed ownership’. United States have been referred to as ‘paradigmatic liberal economy’ since the securities market is extremely liquid and economy is driven by market relations. Banking in America is fragmented and decentralised. The history of corporate governance in Britain is very different from that of the US. In France corporate governance is extremely different from that of Britain and the US. Stakeholders have had great importance in corporate governance in Germany. France, Britain, the US and Germany’s corporate governance has been characterised reduced banking rationality, ‘greater dispersal of holdings’, greater liquidity in securities market, increased attention to shareholders. Corporate governance in Japan was characterised by a ‘caesura in the mid-twentieth century’. Three dissimilar patterns of corporate governance existed in Japan. Japan was characterised by joint stock companies, liquid securities market and the companies were directed by professional management towards the interests of the shareholders. State ownership and limited partnership companies also existed. The paper states that the UK and the US corporate ownership are dispersed and it is concentrated in Japan, Germany and France (Herrigel, 2006). Corporate Governance in UK In an article Understanding “How Issues in Corporate Governance Develop: Cadbury Report to Higgs Review” By Jones (2003) an identifiable process determines corporate governance in UK. Various investigations have been carried out in the UK to bring about improvement in corporate governance. This lead to the generation of various reports namely Cadbury report, Hampel report Turnbull report and the Greenbury report. A company law review was also conducted. In the UK corporate governance is dealt with by setting up a committee. The various stakeholders in relation to corporate governance are referred to as influencers. Broad group of influencers were identified by Jones and Pollitt namely public opinion, exogenous factors, business and the authorities. Business includes the various corporate and financial and non financial stakeholders. Authorities include various regulatory bodies. Public opinion includes media and exogenous factors include various scandals. Influencers have been categorized as type A and type B. Type A are proactive and the initiators and type B are followers. The paper analysed the mode in which the analysis was carried out to generate the report. The Cadbury report differed from Higgs Review in the mode of analysis. The various influencers had different impacts on the different reports (Jones, 2003). Corporate Governance in US “The State of U.S. Corporate Governance: What’s Right and What’s Wrong?” by Holmstrom (2003) highlights the criticism that US corporate governance had to face subsequent to the Enron scandal. Thus legislative changes were brought about like the Sarbanes-Oxley Act of 2002 and various regulatory changes in the governance guidelines in NYSE and NASDAQ. The paper elaborates on the fact that although corporate governance in US has been failed but quick steps has also been taken to address the problem. Moreover, the paper also discusses on how improvements can be brought about to make corporate governance more effective in US (Holmstrom, 2003). The research paper “The Evolution of U.S. Corporate Governance: We Are All Henry Kravis Now” by Kaplan (1997) traces the changes in corporate governance in US since the 1980s. The paper discusses on the prominence of LBOs (Leverage Buy Out) and raiders in the 1980s and the reason behind them not appearing again in spite of the resurgence of takeovers. Several hostile takeovers and raids had occurred during the 1980s. The paper analyses the restructuring and the takeover wave of the 1980s. The corporate governance in the 1990s has also been discussed elaborately in the paper. Finally the effectiveness of the present corporate governance in the US has been discussed in the paper (Kaplan, 1997). According to a research paper “Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s” by Holmstrom and Kaplan (2001) there has been a dramatic change in corporate governance in the US since the 1980s and the 1990s. The era of the 1980s was characterized by takeovers, mergers and restructuring activities. The paper traces the changes that have taken place in corporate governance since the 1980s (Holmstrom & Kaplan, 2001). Corporate Governance in France In an article by Goyer (2011) “The Transformation of Corporate Governance in France” corporate governance in France gained prominence due to the increasing importance of foreign ownerships and the large amount of financial losses occurred because the managerial activities were not monitored. Corporate governance in France has been associated with layoffs and a short terms approach. The success of the American model of corporate governance made it serve as a benchmark for other nations. Corporate governance in France has also been restructured. There has been a transformation from cross shareholding to greater degree of foreign ownership. French companies are shifting from their strategy of corporate diversification. The blue chip companies are focusing on a small set of core competencies. Employees feel threatened since their employment tenure is determined by the financial performance of the company (Goyer, 2011). Corporate Governance in Germany In Germany the independence of auditors has been stressed on. In Germany an independent control institution for financial disclosures has been proposed. A convergence of corporate governance practices with that of the US has been observed in Germany. Germany has a different approach towards management compensation. The German model of corporate governance has a greater shareholder orientation. The convergence towards the US corporate governance is in order to gain access to the capital market of the US. A corporate governance regime similar to that of the US has been considered as essential. The paper elaborately discusses on the existing corporate governance practices in Germany and how it can be converged with that of the US corporate governance (Suchan, 2004). Corporate Governance in Japan “The Corporate Governance Model of Japan: Shareholders are not Rulers” is a research paper by Allen (2007) that states in contrast to corporate governance in the US and the UK, corporate governance in Japan encompasses a larger number of stakeholders. The article highlights the contrast between Anglo American corporate governance and the corporate governance in Japan. Thus resource utilisation is done in a manner to consider the interests of a larger number of stakeholders. In Japan hostile takeovers are unheard of and companies are characterised by cross shareholding. The firm structure in Japan has been referred to as ‘J-mode’ and in the US ‘H-mode’ (Allen, 2007). An article “Japan's Own Brand of Corporate Governance: Shareholders Don't Rule” by Wharton (2006) elaborates on how corporate governance is being reformed in Japan. National corporate law has been amended in Japan. Improvements are being brought about by implementing more of ‘shareholder friendly practices’, boards are being restructured and better accounting and auditing practices are being brought about. However, shareholders are not given the most prominence. The former president of JP Morgan Trust Bank in Tokyo, John Thomas states "Shareholder rights are less important than the survival and success of the corporation.” The ranking of Japan amongst the industrialized nations is second last in corporate governance (Wharton, 2006). References Allen, F., 2007. Abstract. The Corporate Governance Model of Japan: Shareholders Are Not Rulers. [Online] Available at: http://finance.wharton.upenn.edu/~allenf/download/Vita/Japan-Corporate-Governance.pdf [Accessed February 10, 2011]. Carriere, G. & Et. Al., 2002. The Changing Nature of European Boards. European Corporate Governance: A Changing Landscape? [Online] Available at: http://sloanweb.mit.edu/50th/pdf/corpgoveuropepaper.pdf [Accessed February 10, 2011]. Garcia, R. & Et. Al., 2008. Governance Structures. Shareholder vs. Stakeholder: Two Approaches To Corporate Governance. [Online] Available at: http://insight.iese.edu/doc.aspx?id=866&ar=17 [Accessed February 10, 2010]. Goyer, 2011. U.S.-France Analysis. The Transformation of Corporate Governance in France. [Online] Available at: http://www.brookings.edu/articles/2003/01france_goyer.aspx [Accessed February 10, 2010]. Herrigel, G., 2006. Five Corporate Governance Regimes. Corporate Governance: History Without Historians. [Online] Available at: http://home.uchicago.edu/~gherrige/publications/final_draft_cg_paper.pdf [Accessed February 10, 2010]. Holmstrom, B., 2003. Abstract. The State of U.S. Corporate Governance: What’s Right and What’s Wrong? [Online] Available at: http://faculty.chicagobooth.edu/steven.kaplan/research/holmkap2003.pdf [Accessed February 10, 2010]. Holmstrom, B. & Kaplan, S. N., 2001. Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s. Journal of Economic Perspectives. [Online] Available at: http://www.hss.caltech.edu/~camerer/BEMEc146/Winter07/kaplanholmstromjpe01.pdf [Accessed February 10, 2010]. Jones, I., 2003. Introduction. Understanding How Issues in Corporate Governance Develop: Cadbury Report to Higgs Review. [Online] Available at: http://www.google.co.in/url?sa=t&source=web&cd=2&ved=0CCkQFjAB&url=http%3A%2F%2Fciteseerx.ist.psu.edu%2Fviewdoc%2Fdownload%3Fdoi%3D10.1.1.167.5998%26rep%3Drep1%26type%3Dpdf&rct=j&q=corporate%20governance%20in%20UK%20site%3Aedu&ei=hLNYTertGNGzrAeXwf22Bw&usg=AFQjCNFcHjp5b39sNBFukCRgzxTV8Fc5PA&sig2=n0f-wFBDqBNmLOf9AEY2VQ&cad=rja [Accessed February 10, 2010]. Kaplan, S. N., 1997. Abstract. The Evolution of U.S. Corporate Governance: We Are All Henry Kravis Now. [Online] Available at: http://faculty.chicagobooth.edu/steven.kaplan/research/govern.pdf [Accessed February 10, 2010]. Suchan, S. W., 2004. Introduction. Post-Enron: U.S. and German Corporate Governance. [Online] Available at: http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=1015&context=lps_papers [Accessed February 10, 2010]. Waddington, N., 2004. Introduction. The Europeanisation of Corporate Governance in Germany and The UK. [Online] Available at: http://aei.pitt.edu/6119/01/waddington16july.pdf [Accessed February 10, 2010]. Bibliography Chew, D. H. & Gillan, S. L., 2009. Global Corporate Governance. Columbia University Press. Colley, J. L., 2003. Corporate Governance. McGraw-Hill Professional. Hovey, M., 2004. Corporate Governance in China: An Empirical Study of Listed Firms. Griffith Business School. Khamis, M. Y. & Semlali, A. S., No Date. Impact of the Global Financial Crisis on the Gulf Cooperation Council Countries and Challenges Ahead: An Update. International Monetary Fund. Knell, A., 2006. Corporate Governance: How to Add Value to Your Company: A Practical Implementation Guide. Butterworth-Heinemann. Monks, R. A. G., 2008. Corporate Governance. John Wiley and Sons. OECD, 2004. Corporate Governance: A Survey of OECD Countries. OECD Publishing. Schwab, K., 2008. The Financial Development Report 2008. World Economic Forum. Sison, A. G., 2008. Corporate Governance and Ethics: An Aristotelian Perspective. Edward Elgar Publishing. Read More