Institutional Approach to Global Corporate Governance: Business Systems and Beyond: Volume 9

Effective mechanisms for corporate governance are essential for market-based economic systems. This chapter addresses the necessity of corporate governance research to address the competing goals of various stakeholders in the firm: managers, suppliers of financial capital, and other stakeholders. The review of literature reveals that firm-level complexity, as well as diversity of national business systems, are important for understanding corporate governance practices and regulations around the world.

In this chapter, we investigate empirically the role of corporate and institutional governance in attracting FDI compared to forms of incentives, such as lower taxes and wage costs. In particular, we use a two-step gravity approach, where in the first step we control for a number of determinants traditionally used in gravity models and in the second we test explicitly for the significance of a set of indicators measuring institutional and corporate quality. Our results seem to validate the hypothesis that corporate governance and institutional quality are important attractors of FDI.

This chapter empirically investigates how banks evaluate the creditworthiness of small- and medium-sized enterprises (SMEs). Following SME loan underwriting literature that distinguishes among different lending technologies, we test whether the typical SME bank loan is underwritten primarily based on just a single technology. We find that although financial statement lending is the most commonly used and serves as a kind of basic technology, it tends not to be used to the exclusion of other technologies. These findings imply that, at least in Japan, SME lending practice may be inconsistent with academic research on how banks underwrite loans elsewhere.

This chapter reviews some of the cohesive concepts raised in the recent literature regarding normative dialogues between business and society. The purpose is to draw a few meaningful implications toward formulating new guiding philosophies for interaction between large global businesses and society in general. As these concepts tend to counterbalance the preponderance of the pure free market ideology and the traditional understanding of cultural segregation, the chapter's discussion thereof should help synthesize divergent arguments into a unified framework for business–society interface in this globalized environment.

Efforts to create an international system for corporate responsibility should now be concentrated not on the drafting of yet more rules and standards, but on the strengthening of existing international institutions. This chapter first outlines the problems with using rules that are generally not enforceable within national courts to make global corporations accountable. It is argued that at least some of these obstacles could be overcome by strengthening already existing international institutions. Four such institutions are examined – the existing regional human rights bodies, the International Criminal Court, the International Labor Organization (ILO), and an expanded International Court of Justice.

This chapter describes how governments and regulators could introduce selective de-regulation based on exempting corporations from existing practices when they amend their constitutions to provide superior outcomes for investors and other stakeholders. An example is presented on how a company efficiently raised new equity through constitutional changes that also allowed the regulator to exempt it from the compliance processes and costs of changing auditors. System science is used to argue that the introduction of self-enforcing co-regulation based on outcomes rather than practices could introduce competition for developing the most efficient and effective regulation by both companies and regulators.

This study investigates the impact of corporate governance mechanisms on performance related turnover. Our results indicate that smaller boards and institutional block holders are positively related to the likelihood of performance related turnover. CEOs that also hold the position of the chairman of the board or belong to a founding family face lower likelihood of turnover. CEO stock ownership is negatively related to turnover and CEOs who own 3 percent or more of their company stock face a significantly lower likelihood of performance related turnover. Moreover, protection from external control market has no effect either on the likelihood of turnover.

Board size has received significant attention among researchers and regulators. However, the advisory role of boards has not been studied much. In this study I examine the notion that investors value larger boards for their advisory capabilities. Prior studies examine board size in the context of monitoring role of corporate boards and find opposite effects on debt holders and equity holders. Using market-based measures of total firm performance, which take both equity and debt into account; I find that larger boards are associated with greater economic value added (EVA). Using a sample of S&P 1500 firms from 2000 to 2003 and controlling for various firm and industry characteristics, I also find that the board size is positively associated with firm productivity and various other efficiency measures such as return on assets (ROA), return on equity (ROE) and Sales-Turnover ratio. I argue that firms with larger boards, valuing the advisory role of directors offer greater compensation to the directors. Overall the results indicate that large board size has a positive impact on firm's performance. The results are robust to alternative measures of firm performance and other key variables.

When corporate governance is effective, new managerial contracts should maximize shareholder wealth. The Omnibus Budget Reconciliation Act (OBRA) of 1993 provides a natural environment to examine the effectiveness of corporate governance. We find that firms affected by OBRAs $1 million cap on non-performance-based compensation experience abnormally high returns around the board meeting and proxy dates when contracts are voted on. These findings are consistent with effective corporate governance and efficient contracting and contrary to expropriation theory. Firms not affected by OBRA do not have a positive stock price reaction to new contracts and increase both cash and bonus compensation.

We analyze corporate governance mechanisms in Canadian and US firms. We show that despite similarities in governance practices in both countries, there are differences in the efficacy of these mechanisms. In particular, the performance of Canadian firms is less sensitive to ownership structure than that of US firms. Differences are also found in the performance implications of incentive pay. Our study suggests that country-specific governance trends persist among Canadian firms cross-listed in the United States. These findings may explain why Canadian firms which are cross-listed in the United States continue to trade at a discount compared to their US counterparts.

This chapter analyzes the market response to ticker symbol change of stocks with non-conventional voting structures (or multiple class shares, MCS). I find a significant drop (increase) in prices and liquidity (short-sale activity) of MCS stocks, with the most severe decrease being reported for the lower-voting class. This evidence suggests that investors revised downward the assessment of MCS stocks. Regression analysis shows that a significant part of the cross-sectional variation of the event-results is explained by firm's agency costs. Overall, the chapter stresses the importance of enhanced market transparency in curbing private benefits.

This chapter contrasts the effects of main bank–firm ties on the performance of firms in the changing economic environment of the Japanese financial system. The dual stake of the main bank as stockholder and creditor has a positive effect on stock returns in the growth period, but a negative effect in the contraction period. The empirical results suggest that the current problems in the Japanese economy can be traced back to the failure of corporate governance that cast dark clouds on the Japanese economy after the bursting of the economy in 1990.

Using panel data derived from recent financial statements, we examine the relationship between changing creditor protection and leverage (and debt maturity) in a number of emerging market countries located in Central and Eastern Europe. We examine unlisted firms, which are more likely than listed companies to face credit constraints. Our main hypothesis is whether unlisted firms change their leverage and debt maturity as creditor rights increase. We confirm this to be the case at both the country- and firm-level; our findings are robust to alternative econometric specifications and inclusion of country- and firm-level controls. We also find that legal origin is related to the level of debt and its maturity.

This chapter analyses recent reforms of the derivative claim in the UK as implemented by the Companies Act 2006. Recent reforms and modernisation of company law is part of a drive to facilitate enterprise and enhance the attractiveness of the UK as a location in which to do business. The reforms of derivative claims are, naturally, part of this wider drive. The chapter focuses on those areas that are particularly relevant to the question of whether the new legal framework relating to derivative claims is likely to promote these goals.

This chapter investigates the role of macro corporate governance (legal and extra legal institutions) in determining the extent of ultimate excess control (i.e., the ownership-controls rights divergence of the ultimate owner) using a large sample of Asian and European companies. We find that the level of excess control is lower in countries with (1) good investor protection and better enforcement of information disclosure and (2) fairer competition laws, higher newspaper diffusion, and more regulated insider trading. Controlling for institutions subsumes the effect of firm-level determinants, as only leverage appears to be negatively and significantly related to excess control.

This chapter reports the progress of corporate governance reforms in nine East Asian economies as disclosed through two independent studies. The first study is a stock-taking exercise to take note of on-going reforms in corporate governance rules and regulations through a scorecard on corporate governance conducted by experts among the regional economies. The second study covers perceptions of the implementation and enforcement of corporate governance rules as seen by fund managers and analysts. The two studies yield different results, indicating a divergence between the regulatory environment and market perceptions of corporate governance practices in the nine economies.

This study constitutes an empirical investigation of how the political connections of corporate management influence the corporate performance. Connections can be established by the corporate executives through inheritance or active development. When the nature of political connections is not differentiated, the political connections of corporate CEOs and board chairs in general have statistically insignificant impacts on the firm performance in China, reflecting both the benefits and costs of connections. With differentiation, it is found, however, that developed connections are associated with an improvement in firm performance, while inherited ones are associated with a decline in firm performance.

Although researchers and multilateral agencies recognize that no single model of corporate governance exists, this has not stopped the push for a one best corporate governance model. Research recognized institutional factors, including culture, affects the nature of corporate ownership structure and consequently on disclosure, transparency and enforcement practices. Drawing on East Asian examples, the chapter argues that a focus on ‘market’ principles alone fails to account for the contextual effects of Asian political, historical and institutional forms which moderate corporate governance systems and practices. This chapter suggests that there is the need to consider the extant effects of ‘culture’ on corporate governance.