Challenges of Governing Globally: A Strong Understanding of the Three Distinct Corporate Governance Systems around the World Will Help Managers Conduct Business More Effectively in Other Countries
Epstein, Marc J., Strategic Finance
Shortly after New Year's Day in 2009, just six months after Satyam and its politically influential chairman, Ramalinga Raju, were honored by the World Council for Corporate Governance, the company and its senior leadership became the subject of the largest corporate fraud investigation in India's history. Raju admitted to fabricating 70 billion rupees ($1.5 billion) of Satyam's assets and 95% of the previous year's revenue. Despite its record for good governance, this large, respected outsourcing firm saw its market value fall more than 80% in 24 hours. Long before the confession, shareholders had expressed dissatisfaction with Raju's leadership. Many charged that the board of directors and its members failed to meet their basic responsibilities.
Senior executives aren't the only perpetrators of corporate fraud. A scandal at Volkswagen (VW), Germany's largest carmaker, erupted in 2005 when it was discovered that managers and labor representatives had received improper benefits from the company and its suppliers. A quid-pro-quo agreement had developed between managers and labor that centered around the important role that union representatives play on German boards (workers' representatives have 50% of the seats on the supervisory boards of companies with 2,000 or more employees). In return, the local government, which was the controlling shareholder of the corporation with only 18% ownership (the voting rights of any single share-holder are limited to 20%), was satisfied with the ability to guarantee regional job security. Yet it seemed that the other shareholders may not have been receiving equal benefits, and the VW board found itself unable or unwilling to protect its minority owners from actions that didn't maximize the returns to everyone.
Not all corporate governance failures involve financial fraud. In 2010, BP, one of the world's largest oil and gas companies, saw its market value fall by more than 50% in less than 60 days after the infamous explosion at a deepwater drilling rig off the U.S. Gulf Coast. The incident killed 11 employees and resulted in the largest marine oil spill in history, costing BP billions of dollars in compensation for victims and cleanup costs. The government investigation of the explosion revealed numerous causes and guilty parties. Many people have suggested that BP's board failed to put the right processes in place to ensure that reasonable safety measures were taken to prevent such a disaster.
These stories occur far too often in corporations all over the world. Enron, WorldCom, and Tyco in the United States and Parmalat in Italy immediately come to mind. Sometimes these failures are fraud, and sometimes they're the result of poor oversight. Nevertheless, they have caused us to reexamine the structures, systems, and processes of corporate governance.
As you know, corporate governance the system by which corporations are directed, controlled, and made accountable to shareholders and other stakeholders. Failures such as those outlined above occur in a wide variety of companies and industries and in different countries around the world. Understanding corporate governance practices globally should be a priority for managers who work in multinational corporations or with international clients.
"Here I'll describe three corporate governance systems--Anglo-American, Communitarian, and Emerging Markets--and provide a comparison that you can use to recognize and evaluate differences in practice. This is a summary of extensive work that I recently completed in response to many inquiries from senior managers who want to better understand how to evaluate corporate and board performance in other countries.
Table 1 summarizes some of the major differences in the general characteristics of each system.
Table 1: General Characteristics of Global Corporate Governance Systems ANGLO-AMERICAN COMMUNITARIAN EXAMPLES OF United States, Japan, Germany, COUNTRIES/REGIONS United Kingdom, Belgium, Australia, Canada, Scandinavia South Africa GENERAL CHARACTERISTICS * * Shareholder-centric Stakeholder-centric * Market centered * Bank centered * Unitary board * Two-tier board structure structure (supervisory & management) * Boards primarily * Labor, founding composed of family, and bank are nonexecutive common members-- directors (and interlocking common independent directors) * Common law legal * Civil law legal system system * High levels of * Moderate levels of disclosure and more disclosure rules on disclosure * Large pay * Pay incentives incentives for moderate managers, including pay for performance EMERGING MARKETS EXAMPLES OF China, Eastern COUNTRIES/REGIONS Europe, India, Brazil, Mexico, Russia GENERAL CHARACTERISTICS * Stakeholder-centric * Government/Family centered * Board structure varies * Few independent board members * Legal systems relatively weak * Low levels of disclosure * Pay incentives smaller
Global Corporate Governance Systems
Corporate governance practices vary globally as a result of significant country differences, such as culture, history, regulatory systems, and economic and financial development. …