The convergence of Global Corporate Governance - Essay Example

Convergence of Global Corporate Governance “Discuss the extent to which corporate governance practices around the world are converging.” Introduction The role played by the organizations has gone through several transitional phases which enhanced their level of contributions made towards the social system. Earlier business organizations were centrally focused on the aspects of profit making and increase their productivity. In the context of contributions towards the social system organizations have gradually become proficient. Organizations after discovering the essentiality of corporate governance and social responsibility have increased their effort level towards these activities. The complexity of the business world in the free market economy resulted into establishment of governance system which monitored the activities of the business organizations in the social perspective. The concept worked effectively since its emergence and gained significant attention with the enlargement of the market size. As per the present day business environment corporate governance has become an inseparable element of the business system. Considering the increasing level of globalization nations around the world are trying to bring compatibility among their perceptions and views on the issue of corporate governance and business ethics. Researchers around the world possessing variable views on the issue of corporate governance have made it more complicated which has increased the possibility of debate on the issue of its convergence and divergence as well. Different groups of believers contradict each other views and justify their explanations in different ways. Organizations now days have extended their area of operation as they receive opportunities in the global market. With an extension of the areas of business operations the governance systems also become stringent. In the era of globalization the free market policies have lured many organizations to grow themselves by entering new territories (Colley et al., 2005, p.2). This enforced organizations to develop strategies and policies which are comprehensive and applicable at global level. The policies for corporate governance and corporate social responsibilities are also needed to be comprehensive. Through these policies organizations successfully indicate their involvement towards the betterment of the social system where they are operating. Shareholders and investors are also crucial parts of the organization that are needed to be treated well. Through the effective policies of corporate governance organizations seek the confidence of their investors and stakeholders. As the globalization has initiated the need of comprehensive policies and strategies have also gain priority among the business organizations. Corporate governance system has its role in resolving issues which might rise among the entities involved in the business organization including the external entities which do not have a direct relation with the organization. By having a well structured governance system organizations can reduce the level of conflict among the entities such as the organizational members and the external agencies (Hart, 1995, p.1). The need of a formalized governance system has become necessary for present day organizations because of numerous reasons. Financial scams taken place in recent years like in case of Enron scandal and bankruptcy of Baring bank in UK have urged business organizations and governments to take effective measures for controlling these kinds of activities. Just after the Enron incident the accounting authorities in US have started paying more attention towards the controlling of misuse of accounting records and balance sheet but the recent financial crisis has once again raised the requirement for stringent governance system for monitoring financial transactions and maintaining the optimal transparency with the investors and customers (Kirkpatrick, 2009, p.26). In order to develop control over these kinds of agency issues the Sarbanes-Oxley Act came into existence in 2000 which focused on reinforcing honesty in the profession of auditing and deliver true and factual information to the customers and stakeholders (West, 2009, p.112). The governance system also synchronizes with the features of the business organizations and provides them with the guidance to survive in the global economy (Guillén, 1999, p.2). The governance system of corporate entities provides them with a constitution and reinforces the framework to be followed by every corporate entities operating in the social system. The liabilities which the corporate entities have towards their social and economical system are highlighted by the framework of corporate governance. It has been advocated by sociologists like Fligstein that corporate structures have evolved from the interaction between the social and the cultural norms and hence the developed market is a part of the social system where the economic and social factors have very fuzzy relationship. Due to the fuzzy relationship between the economic and social factors the market has gained the dynamism resulting in variation with respect to the time and place (Jacoby, 2005, p.12). Irrespective of the size of the organization the corporate governance has its role in all of them which binds the organizations with their external environment while giving equal importance to the internal environment of the organizations. As the organization grows the level of complexities also increases making things more difficult and confusing. Considering the increasing level of organizational complexities the corporate governance is also encouraged to be implemented through a step by step approach which addresses all the required issues to be handled by the governance system (IBIS, 2010). Human beings have dominated the world with many of their valuable inventions which have helped in reducing the distance among them. Continuous human efforts have made a prominent mark in the field of technology which has empowered them with capabilities of achieving the unthinkable. The implications of these technological inventions have led the world to shrink with increasing interdependence among the human beings. The result of this interdependence has lead to the emergence of the concept of globalization. Multinational organizations performing multi-location business operations have deeply understood the meaning of interdependence, as a result of which organizations encourage shared learning and empowerment (Global Policy Forum, n.d.). Social scientists have advocated that the process of globalization cannot be considered as continuous; rather they have found globalization to be one of the contradictory processes which is highly fragmented in nature. Opposing this belief some other social scientists have advocated in favor of the converging nature of corporate governance. They have found that on global perspective several similarities can be found in the structural aspects of the system while the outcomes might vary in terms of their equalities. Sociologists who oppose the convergence of corporate governance with the process of globalization have also presented evidences to prove that organizations perform variably in different economic and social modes while possessing the institutional and social structure similar to that of the nations they belong (Guillén, 1999, p.8-9). Globalization can lead to formation of a world which is flat in nature which signifies reduced level of obstruction and competition among organizations. This brings uniformity among the consumers in respect to the quality of the goods and services used. But the uniformity does not seem to be easy in all the aspects as nations have variable forms of difficulties in running their trade practices which mainly include the resources of both financial and non-financial forms. Among them financial resources has remained a major obstacle for developing nations which have direct influence on the uniformity of the organizations in terms of producing quality goods. To bring uniformity in the financial aspect it becomes the obligation of developed economies to support the developing nations in financial terms. In relation to this Robert Lucas found that the differences in the marginal product of capital are very high between the developed and developing nations. As per the data provided by the IMF, the net flow of equity to the developing economies from 1996 to 2004 is found to be negative by $67.4 billion. It clearly indicates that the flow of financial resources is not properly administered to the developing nations. The reason found behind the problem is the poor corporate governance system which did not allow the appropriate flow of financial resources to the emerging economies (Stulz, 2005). The governance system adopted for monitoring the corporate activities at national level by the government entities differs from one nation to another. At first U.S. defined the code of governance after which it was prominently adopted by organizations across the world. During 2008 the matter of governance system gained pace and got created in other 64 nations of developed and developing economies. The initiative was supported by some major global bodies which included the World Bank and the Organization for Economic Cooperation and Development (OECD). These organizations highlighted the code of good governance system and its essentiality for the developing and developed economies across the world (Aguilera & Cuervo-Cazurra, 2009, p.377). In UK, the Cadbury report was presented by Sir Adrian Cadbury in 1992 with the purpose of controlling financial scandals and bankruptcy. Prior to this some of the organizations of UK along with the Financial Reporting Council, the London Stock Exchange, and Accounting professionals formed committee on financial aspects of corporate governance which failed in administrating the governance system. The scandals of BCCI and Maxwell occurred after the formation of the committee in 1991. This resulted into the formation of Cadbury report (Mallin, 2007, p.23-24). The traditional view of corporate governance has classified the types into two major categories namely, ‘insider’ and ‘outsider’ models which are prominent among the OECD nations. These governance systems vary on the grounds of ownership structure, financial structure, laws and regulations, which are implied on the organizations belonging to the nations. As per the ‘outsider’ model which is prominent in the United States and the United Kingdom majority of the company’s stake remain in hands of a wide group of members comprising both the individual and institutional owners. The share possessed by the institutional investors has increased with the time in U.S. and has already dominated the U.K. The outsider model separates the management of the organizations from the investors which has both negative as well as positive outcomes. In the case of managers, they are concerned with the productivity of their organizations and adopt several approaches to achieve the desired level. Considering the negative part, managers can make inappropriate usage of organizational resources for their personal gains. Considering the investors part, they are concerned with the profitability of the organization and tries to reclaim their invested amounts. In this context the investors might not involve themselves in small firms where the risk of loss is higher. This could stall the developmental process of small firms and financial resources get accumulate with the larger firms. During 1980s many researchers have found that these kinds of agency issues decrease the corporate performances. Analysts further discovered that following the ‘insider’ model, governance system agency problems can be reduced. In the ‘insider’ model the corporate control over the governance system are handled by the entities which share a permanent relationship with the company in economic terms. With this discovery, organizations in U.K. and U.S. have found it more beneficial for the capitalist markets to deliver potential and efficient economic performances. In the ‘insider’ model the corporate controls are held by the agents who have shared long term stable relationship with the organization. Since the governing bodies are internal to the organization they can communicate with each other more easily. Strength of the ‘insider’ model is of the opinion that the controlling body has more than one relation with the organization other than the matter of investment. These features of ‘insider’ model make it a better option over the ‘outsider’ model and can resolve the agency issues better than the other (Nestor & Thompson, n.d.). It is very much true that whatever level of convergence is attained in the corporate governance structure at global level, the governance structure at the national level has still not shown any form of interest towards the issue of convergence of the governance system. One of such potential example is the Sarbanes-Oxley legislation in the U.S. which was a public policy intended to make systematic divisions instead of going for the drive following the normative global ideal. It is a potential evidence to prove the existence of external forces which tries to control the convergence and is against the convergence of governance system. In the process of convergence of corporate governance system on global level it is very much difficult to include the national level corporate governance system. Prior to including the national governance system under the convergence it is essential to identify the forces which hinders the convergence process of governance system. The differences lying at the national level in terms of structure, approaches dependent upon the rules and regulations, property rights regimes, and economic conditions are prime concern for the process of convergence of global corporate governance system. The path adopted for the development of governance system also has a crucial role in hindering the convergence of corporate governance system at global level. It is very essential to consider the previous records and events through which the current governance system has been developed. In U.S. the financial institutions have very nominal role in the controlling the organizations while it is opposite in the case of Germany or Japan. It is so in U.S. because if the previous events and specifications which restricted the in-depth involvement of banks and financial institutions into the business organizations (Yoshikawa & Rasheed, 2009, p.392). The high level of differences in the governance system at domestic or national level is a major reason which obstructs the convergence of governance system in corporate sector. Researchers have found evidences which indicated the convergence of the governance system with many nations adopting the cross-national governance system. Porta et al. (1998, 1999) and Shleifer and Vishny (1997) studied the convergence of the governance system and emergence of cross national governance system. Figure – Convergence of Governance system across the world (Source- Clarke, 2004, p.229-30) Their studies emphasized more on qualitative indicators rather than quantitative ones with consideration of various aspects of governance system acting as indicators. The considered very small number of countries under its study and followed the literatures proposed on the governance system. Convergence of the Anglo-Saxon model of governance was also considered under the study to analyze the pressure of convergence on it. The institutional investors present in countries considered under the study also found to be influenced by the convergence of the governance system. Another major component which gets benefited due to the convergence of the governance system is the foreign direct investment (FDI) made by large institutional investors. By adopted cross national governance system the FDI became more prominent among developing nations which got support from developed economies (Clarke, 2004, p.229-30). Conclusion The convergence of governance system for corporate sector at global level can be considered as a hypothetical concept which has become a debatable issue among the researchers dividing them into two separate groups. Each of the group possesses different views on the matter of convergence of the governance system. The essentiality of governance system can be considered to be important in the context of saving the interest of stakeholders and the consumers. But taking the issue to a global perspective cannot be achieved as of now because of the presence of several numbers of factors which influence the process of convergence of the corporate governance system. The differences which have been created among the nations since their evolution of governance system have brought a major obstacle for the corporate sector across the world for the process of convergence of governance system. Major differences are found among the western economies and European nations with that of the governance system adopted by the nations of Asia-Pacific region. In conclusion it can be understood that the convergence of the governance system cannot be achieved through the globalization as the process of globalization is itself questionable in terms of its uniformity for all of the nations across the globe. Reference Aguilera, R. & Cuervo-Cazurra, A. 2009. Corporate Governance: An International Review- Codes of Good Governance. Clarke, T. 2007. International corporate governance: a comparative approach. Routledge. Colley, J., Doyle, J., Logan, G. & Stettinius, W. 2005. What is corporate governance? McGraw-Hill Publications. Global Policy Forum. No date. Global Policy Forum: Defining Globalization. [Online] Available at: http://www.globalpolicy.org/globalization/defining-globalization.html [Accessed on April 1, 2010]. Guillén, M. September 1999. CORPORATE GOVERNANCE AND GLOBALIZATION: ARGUMENTS AND EVIDENCE AGAINST CONVERGENCE. Hart, O. 1995. Corporate Governance: Some theories and Implications. 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