Themes and Variations: The Convergence of Corporate Governance Practices in Major World Markets

Article excerpt

INTRODUCTION

The generally accepted definition of the phrase "corporate governance" comes from the seminal report of the Committee on the Financial Aspects of Corporate Governance, which was chaired by Sir Adrian Cadbury. (1) The Cadbury Report defines corporate governance as "the system by which companies are directed and controlled." (2) It has been defined by others as "a system of checks and balances between the board, management and investors to produce an efficiently functioning corporation, ideally geared to produce long-term value." (3) At its most basic, corporate governance deals with the relationships among various stakeholders with respect to the control of corporations. Above all, corporate governance addresses the relationship between the owners of a company--the shareholders who are the principals--and those who manage the company's operations--the executives hired to run the company as agents of the principals. (4) Corporate governance encompasses the weight given to various factors in connection with the process for making strategic decisions, the adequacy and transparency of disclosures, the reliability of financial reporting, and compliance with laws and regulations. (5)

Over the past several years, scholars have written extensively about the convergence of corporate governance practices around the world. (6) In the post-Enron era and with the passing of the first anniversary of the Sarbanes-Oxley Act, (7) we can clearly see that the pace of change has hastened; in some markets where corporate governance was nascent, it has advanced considerably in a short period of time as regulators around the world are united by a desire to restore the confidence of investors in the world's securities markets. Despite the swirl change, the convergence of governance practices will never be complete for many reasons, although certain core principles will be recognized in virtually every country as fundamental to a market economy.

This article reviews some of the factors affecting this convergence process and also looks at the status of convergence between the United States' governance laws and practices and those of certain other major markets. Specifically, the article briefly reviews recent corporate governance changes in Canada, Germany, Japan, Mexico and the United Kingdom from the perspective of a practitioner who has been involved in various governance issues in subsidiaries and acquisitions in these markets. In each of these countries, one constant is that the corporate governance principles to which companies are subject are imposed through several sources. In the United States, for example, principles of corporate governance applicable to a public company created under the laws of Delaware are derived from the Delaware General Corporation Law, (8) state and federal securities laws, and the listing standards of any stock exchanges upon which that company's stock is listed. (9)

FACTORS AFFECTING CONVERGENCE

Internal and external factors influence companies to establish good governance practices. While certain factors that influence companies in the area of corporate governance are specific to the country, or even the state or province in which a company is domiciled, many of these factors transcend geographic borders. Many different factors, such as the philosophical approach, market forces, political forces and the cooperation of various global entities, have played a role in the progress toward convergence. (10)

THE PHILOSOPHICAL APPROACH TO GOVERNANCE

One impediment to complete convergence is the varying philosophical approach to governance regulations. Some countries approach corporate governance in a manner that differs substantially from the approach adopted in the United States. With the passage of the Sarbanes-Oxley Act and the adoption by the Securities and Exchange Commission of various enhanced corporate governance standards, the United States has progressed even further into a law-based, or rules-based, approach to governance. …