Corporate governance


"Corporate governance is a term that primarily refers to the rules, processes or laws by which businesses are monitored, managed and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation in addition to the external forces such as consumer groups, clients and government regulations" (

At one end are the shareholders as the business owners who provide the significant risk capital and at the other end are the managers or the board of directors who look after the day-to-day affairs of the company. It is the duty of the board of directors being the elected representatives of the shareholders to manage the operations of the company. The shareholders being the business owners are not only expected to supervise and assess the operations of the company but also ensure the efficiency of the entire board of directors and the executive directors. An organisation with good corporate governance will always promote a harmonious relationship amongst shareholders, executive directors and the board of directors which will result in improved efficiency of the company (Nisa and Warsi, 2008).

Corporate governance mechanisms vary from corporation to corporation and from country to country. The corporate governance mechanisms in corporations around the world are formed by means of certain objectives and the political, economic, legal and social history of a country. It is the attitude and approach of the top management and the values and principles adopted by a corporation that reflects their corporate governance practices. For most corporations, corporate governance did not develop and surface through a natural business practice, but was more of a compulsory adoption for the reason that of the obligations and necessities of legal compliance within a particular country or to authenticate industry standards (Nisa and Warsi, 2008).

Corporations today have laid down the policies of corporate governance in their own manner as a result of which an important question that has cropped up is whether standard corporate governance norms can be established and achieved at a global level. Companies today, have crossed precincts and boast a global presence which clearly highlights the need for universally acceptable corporate governance standards (Nisa and Warsi, 2008).

Consequently, all the countries at this time are more concerned as to what should be the preeminent corporate governance practices. Several committees were formed by different countries in the last two to three decades for proposing the corporate governance standards that should be adopted by companies worldwide. The Cadbury Committee, 1992 shed light on the role of board in corporate governance. The importance of board composition, remuneration committee and their functioning was highlighted. The Hilmer report, 1993 prepared the best practice code for the composition and functioning of boards. The Greenbury Report, 1995 focused more on director's compensation standards and disclosure of remuneration. The Hampel Report stressed upon disclosure and quality of board governance (Solomon 2007).


There has been an immense amount of debate and arguments enveloping the dissimilarities and correlation between national corporate governance systems and the limitations and blockades to the development of a single system of corporate governance (McCahery et al. 2002). Recent studies clearly indicate that corporate governance systems differ across nations. Scholars (Roe 1994; Prowse 1995; Gugler 2001; Barza and Becht 2001) have by and large found variations in corporate governance across nations in terms of their ownership and board structure, managerial incentives, stock markets, government policies, company law, the role of banks and other financial institutions, securities regulation and scores of other characteristics.

Corporate governance analysts have pointed out an archetypal distinction between the market-based models of the United States and the United Kingdom and the bank-based or control-based models of Continental Europe. Scholars (La Porta et al. 1998; Roe 2000; Allan and Gale 2000) characterised market-based models by huge liquid stock markets having diffused ownership with reasonably superior rank of minority investor protection. The prime role of institutional investors in share ownership was also highlighted as well as other features like one-tier boards and performance-sensitive managerial pay.

On the other hand, the control-based models of Continental Europe are characterised by poorer levels of investor protection, diminutive and less liquid share markets, high ownership concentration where a major share of stock is possessed by the founding families, corporate investors and governments (Barza and Becht 2001). Employee representation on boards and government intercession seems to be the focus of attention in many countries (Blair and Roe 1999).

Scholars (La Porta et al. 1999, 2000; Roe 1994) recognised these differences in the legal system, political intercession and cultural diversities. Scholars (Thomsen and Pedersen 1999) attributed such differences to the global variation in the market size, firm size and industry structure. Although the popular view being that the Anglo-American system is much better than the others, there are also factions of the alternative systems such as the state-oriented and stakeholder-oriented systems which exist in countries like Germany, France, Scandinavia region and the countries of Asian legal origin. These factions argue that the principal benefit of these alternative systems is the way the difference of opinion and interests between managers and shareholders are addressed. Conversely a similar issue in a common law country would be resolved by way of monitoring and regulating the market for corporate control and insisting the managers to pursue the welfare of the shareholders. A civil law country would primarily depend upon large shareholder, creditor or employee monitoring (Nisa and Warsi, 2008).

It wasn't too long ago when it appeared that the Anglo-American corporate governance model gained far more success and the European models were converging to US/UK standards. Attention was drawn towards the role of global capital flows in eradicating ineffective forms of governance which was strongly advocated by the supporters of convergence theory. The convergence proposition is expedited as a belief that the alternatives to the US model shareholder-centric governance have usually not done too well. Bodies like OECD and World Bank are encouraging this practice and development by hastening the espousal of universal standards of corporate governance. Nevertheless, some scholars have found strong evidence of de jure convergence at the country level which however is not stimulated by convergence to US norms. It is observed that pairs of economically inter-reliant countries look to espouse familiar corporate governance norms, particularly when these countries fall in the same terrestrial and are moderately developed economies (Nisa and Warsi, 2008).


Globalisation is one of the most important buzzwords of the turn of the millennium and is a quite a popular and blazing debate at the present time. Global economic integration is at present the most significant aspect of corporate governance studies. There are mainly two ways by which globalisation affects the corporate governance transformation schema. At the foremost it raises a big concern whether specific corporate governance methods can tender competitive economic benefits. The firm performance of a country is determined when aligned with global standards and the performance is often found lacking when a competitor takes away market share or procreates speedily (Nisa and Warsi, 2008).

Secondly the capital markets anxiety on corporate governance is such that the firms have novel grounds to switch to public capital markets. The US model based firms in order to raise funds typically desire to have ready availability of an initial public offering for the venture capitalist to egress. Today the firms that are looking to spread out in the global arena fancy utilising stocks than cash as acquisition currency. For instance if a firm wants US investors to buy and hold a stock then they would be pressed on adopting corporate governance norms that those investors might be complacent with. The internationalisation of capital markets has only piloted more cross-border investments regardless of the inclination towards the home country. The new stockholders would usually favour a corporate governance scheme that they are more comfortable with and often hold a belief that reform will boost their stock worth (Nisa and Warsi, 2008).

It has been seen in recent years that a drift towards convergence of corporate governance regimes has been building up. The firms are feeling the anxiety to acclimatise and intermingle as an outcome of globalisation. The firms have to compete worldwide and in order to do so the excellence and value of their products have to be of such global standards which edicts definite convergence of cost structures and firm organisation. It could be said that convergence is the consequence of globalisation in capital markets due to new financial instruments like American Depository Receipts and Global Depository Receipts, strong competition in the international market and the surfacing and development of new financial intermediaries have drastically transformed the corporate finance setting globally. The governments are becoming exceedingly cognisant and alert to meet certain corporate governance conditions with the aim of plugging themselves into this large pool of global financial resources (Nisa and Warsi, 2008).


There are essentially two types of Insider Models i.e. the European Model and the East Asian Model. The European continent symbolises one type of insider model, however there are a number of diverse adaptations in different European countries.

Insider Model:

The European Model: The foremost element of this model is that a comparatively small condensed cluster of shareholders have power over corporate entities and these shareholders usually preserve a long and steady association amongst themselves. The countries that witness a reduced amount of institutionalisation of equity holdings than the Anglo-American outsider model are common to have such an insider model. These countries rely and trust greatly on the corporate sector on banks as a finance resource. Moreover, in this insider model the corporate entities are found to have elevated levels of debt-equity ratios (Nisa and Warsi, 2008).

The East Asian Model: The East Asian model represents the finest description of the insider model where it's the founding family that holds majority of the controlling shares whether directly or through other holding companies. Therefore the major distinction between the European and the East Asian model is that in the latter version, the impervious families are usually the domineering entities. As described above, the European insider model is characterised by an array of controlling forms as well as one fascinating form where the controlling shareholders are backed by intricate shareholder agreements. The countries that have large insider form of organisations tend to be more moderate in their conduct and performance considering that such actions may not entirely be in the welfare of the common shareholders (Nisa and Warsi, 2008).

Outsider Model:

The central characteristic of the outsider model is that there is a separation of ownership and control which arises due to expansively dispersed equity ownership amongst numerous small shareholders and many institutional shareholders. Subsequently it's the professional managers that are in full control of the corporate units. This model is also ascribed as the principal-agent model where the shareholders (the agents) empower the managers (the principals) with effective control over the company and the duty of managing and monitoring the company's day-to-day affairs. The expansion and development of economies world over has imposed the creation of large firms having distant shareholders and professional management. However this has given birth to the agency problem. There is no method to guarantee that the managers will function in the welfare of the shareholders and the stakeholders. Countries like USA and UK go a long way back in time to have had equity ownership by individuals and these countries have over the last few decades watched emanation of numeral institutional shareholders like mutual funds, pension funds and insurance companies that have held a dominant proportion of equity. In the outside model, the main objective of the regulatory and legal framework is to promote and reinforce corporate governance systems that safeguard the interests of the widely dispersed shareholders (Nisa and Warsi, 2008).

In countries like USA, UK, Australia and New Zealand the governments operates as a referee and remain completely neutral with respect to the market. The government would interfere only when maltreatment is to be vetoed or unlawful acts need to be chastised. The governments stress more on fairness and unregulated market forces. The lawyers and auditors play a significant role in these markets. There are transparent and accountable forms of corporate governance and corruption is less likely. In countries like China, India, Italy, Spain, France, Singapore and Malaysia the governments operates as a manager and it does not respect or trust the market. The national corporate heroes seem to be promoted more and bureaucracy is dominant. Corporate governance is opaque and reticent with little public accountability. In countries like Japan, Korea, Thailand, Switzerland, Austria, Germany, Netherlands and Sweden the governments operates as a coach and sidelines partiality. There is administrative guidance and supervision and structured competition. Corporate governance is semi-transparent with limited public accountability and there is extensive scope for corruption (Lehmann, 1997).


Convergence is quite a blazing debate today and the hypothesis that superior global product and labour market competition together with financial amalgamation shows the way to converge on standardised set of practices and methods that are superlative for corporate governance (O'Sullivan, 2003).

(Jensen, 2000; Hansmann and Kraakman, 2002) state that the Anglo-American corporate governance is perhaps the best practice which intends to maximize the shareholder value and opens doors to investment opportunities and procure external funds. However many have argued on the contrary that there is no preeminent way to manage and systemise an economy. (Hollingsworth and Boyer, 1997) argue that even though corporate governance instruments are in place and operation, they are permeated through the prevailing national mechanisms before they could influence corporate governance in a definite place. (Hollingsworth and Boyer, 1997) state that corporate governance will persist to be at variance depending on the institutional perspective in which it is implanted and are expected to react in a different way even if exposed to analogous pressures. (Hansmann and Kraakman, 2000) recognised the catalysts for governance convergence as logic, example and demonstrated competitive advantage. This serves right when the dominant shareholders or the managers of a company implement and espouse international standards of governance that are supposed to work well for them.

But obviously, these forces should be evaluated alongside the other dominant forces that obstruct convergence or that endorse divergence. (Bebchuck, 1999 and Bebchuck and Roe, 1999) elucidated and clarified as to why ownership concentration does not instinctively blend to efficient levels and why a domineering shareholder configuration with high ownership concentration does not consequently materialise into a non-control based configuration even when the market-based configuration boosts the firm's financial value.

(Bebchuck and Roe, 1999) state the rationale behind this is the subsistence of private benefits for domineering shareholders which is unshared with minority investors. The inducement to renounce private control benefits is lessened when firms adopt a mixed ownership arrangement with a few minority investors when the profits made by selling more shares to the public ought to be shared by all and sundry. (Bebchuck, 1999) thus anticipates that control-based governance arrangements will materialise only when control over private benefits are huge. In market-based arrangements managerial control benefits may possibly push the constancy of dispersed ownership. To sustain the company's state of affairs and its parameters, the managers could oppose the creation of controlling blocks and tussle over hostile takeovers (Bebchuck and Roe, 1999).

(Bebchuck and Roe, 1999) indicate that the issues at the systemic level also emanate complications to make any modifications in the ownership structures. (Roe, 1994) advocates that the existence of large stock markets as present in USA and UK or an active banking sector as present in Germany and Netherlands may perhaps influence the ownership and capital structures of the firms based in that system. Also, the incumbent organisations will procure the prolongation of their individual existence.


It's important to keep in mind that the peculiarity between Civil Law systems and Common Law systems is likely to smudge the fact that there is nothing such as a homogeneous system of Civil Law. When the expression Civil Law system is used in contrast to a Common Law system, it typically refers to the complete body of private law within the European continent and Latin America. The general distinguishing trait of these laws is that they are contained in the civil codes. Common Law is only one of the legal communities which are hemmed in the Anglo-Saxon family. Although there are a few arguments in support of this arrangement as there are substantial deviations to the manner and system of construing the law or judiciary. Consequently, one needs to keep in mind that in actuality there is no consistent and logical system of Civil Law (Funken, 2003).

There are no such commercial codes in any common law country that require a shareholder to dump their shares before a general shareholders meeting. Besides these company codes very strongly favour and support the protection of minority shareholder's rights, although, it's very infrequent when the shareholders would have the foremost opportunity to purchase newly issued stocks. Also, there are no requisite rules of dividend in these countries and the ruling of one share one vote gives an unrealistic impression than what is often stated (Nisa and Warsi, 2008).

Conversely, the image is exceedingly heterogeneous in civil law countries. It is said that the French Civil Law countries offer the most substandard quality of shareholder protection. No more than five percent in this faction permit voting by mail plus only an average of fifteen percent share capital is required to call an extraordinary shareholders meeting which is the maximum amongst every legal family. French civil law companies have however performed better than German civil law countries in terms of share blocking for shareholders meeting and for preferential spot of active shareholders to newly issued stock. They also performed much better than the Scandinavian civil law countries in regard to demoralised minority protection and cumulative voting condition (Nisa and Warsi, 2008).

Despite the fact that corporate governance systems differ across the globe there are broadly two types of financial systems. One is the market-based system epitomised in UK and USA and the bank-based system epitomised by Germany and Japan. Countries are positioned at different junctures in this market-institution gamut due to altering course of financial development and their positions are established on the basis of the temperament of their economic attributes and the historical and political forces that silhouette their social order (Nisa and Warsi, 2008).

The share ownership is insubstantially dispersed and the financial institutions engage in a much imperative task to finance corporate activities albeit the basic corporate structure being Anglo-Saxon. In spite of the correlation, share ownership and board representation of financial institutions provides the potentiality to discharge proficient monitoring of management activities. On the other hand, world-wide banking is not pervasive and the powers are much inadequate in comparison to the usual bank-based systems. However, financial institutions have by and large been abortive to execute and accomplish even their limited responsibilities in corporate governance (Nisa and Warsi, 2008).


At this stage the present image indeed remains unclear and the debates and arguments have engendered a far-reaching body of theoretical and empirical work. There is until now no general agreement with regard to the finest system of corporate law and whether legal convergence must be promoted globally. Some theorists have argued that regulatory and institutional convergence of corporate governance practice is probable at a global level although they are in incongruity concerning the course to worldwide convergence. The question is whether the Anglo-American model will completely take over or will we witness the emergence of a new composite model?

(Nisa and Warsi, 2008) assert that corporate governance must become accustomed to the ever sprouting international settings and a mixture of corporate governance mechanisms applied with time would work well only for a impermanent phase. The convergence debate fails to understand that the transformation in the governance environment will inescapably transpire with time and the test to success would be in respect of how a system adapts to the ever-changing environment and not how well it complies with any particular model. The convergence debate believes the paradoxical. The convergence debate has more or less revolved around a wrong hypothesis that the American model had completely evolved and has ceased any further evolution of corporate governance. Theorists tried hard to explicate whether the rest of the world should espouse the definitive American model. Many international organisations adopted the definitive American model but satirically, the American model was not even present in America at that time. Whilst scholastics and theorists endorsed the American model, America was busy altering it. Shareholder primacy driven by hostile takeovers was useful to perform necessary reformation in the 1980s. It shielded the directors from hostile takeovers permitting them to exercise their discretion to erect their newly restructured companies. Bank monitoring was used as a resourceful tool to shrink agency costs during this period.

The foremost question is that which system is better and should prevail in the route to convergence endeavouring to make the emerging systems more competent and efficient. A view can be taken that the economy of the Civil Law and its capability to rapidly become accustomed to changes of the societal environment undoubtedly wins over the convolution of the Common Law. But this study as it has indicated throughout that the convergence debate is abstruse and never-ending. There is no way one could plainly assess the space between broadly defined governance models that are persistently developing models in an unpredictable comportment.