At the same time, capital available for equityinvestment in corporations has become concentrated in the handsof sophisticated financial intermediaries such as pension fundsand mutual funds. This trend was first apparent in the US and theUK, but is spreading with the rise of private investment vehiclesaround the globe. These investors, who view themselvesas corporate "owners", see a link between sound corporategovernance and lowered investment risk.
They exercise theirrights as investors to some degree on the basis of governancequality.
International Corporate Social Responsibility | Globalization
The sheer size of assets in the control of institutionalinvestors exerts pressure on corporations to conform toshareholders' expectations on governance see box "TheAnglo-American influence". In an attempt to appease objecting investors,Chris Gent promised to spend half of his bonus on Vodafone'sshares. EC, , V 5 , 35 The Asian crisis "wake-up".
- Numerical Control over Complex Analytic Singularities (Memoirs of the American Mathematical Society).
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- Ebook Corporate Social Responsibility Corporations Globalisation And The Law Series .
The financialcrisis that began in East Asia, and rapidly spread to Russia,Brazil and other areas of the globe, showed that systematicfailure of investor protection mechanisms, combined with weakcapital market regulation, in systems that rely heavily on "cronycapitalism," can lead to failures of confidence that spread fromindividual firms to entire countries. Insufficient financialdisclosure and capital market regulation, lack of minorityshareholder protection, and failure of board and controllingshareholder accountability all supported lending and investingpractices based on relationships rather than on a prudentanalysis of risk and reward see Ira M.
In hindsight, the not-surprising result was that companiesover-invested in non-productive and often speculative activities.
When capital fled these economies in and , the G7, theWorld Bank and other multilateral agencies recognised that theefforts to strengthen the global financial architecture needed toinclude governance reform. Economic theory holds that when a sole proprietor manages afirm, profits and value will tend to be maximised because theyare directly linked to the owner-manager's self interest thevalue of the owner-manager's investment and income. But whenfirm ownership is separated from control, the manager's selfinterest may lead to the misuse of corporate assets, for examplethrough the pursuit of overly risky or imprudent projects.
Corporate financiers whether they are individuals or pensionfunds, mutual funds, banks and other financial institutions, oreven governments need assurances that their investments will beprotected from misappropriation and used as intended for theagreed corporate objective. These assurances are at the heart ofwhat effective corporate governance is all about see box"The views of leading voices".
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Morebroadly defined, corporate governance can encompass thecombination of laws, regulations, listing rules and voluntaryprivate sector practices that enable the corporation to:. Attract capital. Meet both legal obligations and general societalexpectations. All these factors underscore the reality that corporatemanagers, directors and investors as well as those advisingthem, such as lawyers and accountants function within a largerbusiness and legal environment that shapes behaviour see box"The corporate governance environment".
But whatever view prevails, effectivegovernance ensures that boards and managers are held accountablefor pursuing the corporate objective, however that objective isdefined see "The importance of corporate governance"below. National differences. Different governancesystems articulate the corporate objective in different ways,depending on which of two primary concerns is taken as the mainfocus:. Societal expectations. Some nations focus on the need to satisfy societalexpectations and, in particular, the interests of employees andother stakeholders variously defined to include suppliers,creditors, tax authorities and the communities in whichcorporations operate.
This view predominates in continentalEurope particularly Germany, France and The Netherlands and incertain countries in Asia. Other countries emphasise the primacy of ownership andproperty rights, and focus the corporate objective on returning aprofit to shareholders over the long term. Under this view,employees, suppliers and other creditors have contractual claimson the company. As owners with property rights, shareholders havea claim to whatever is left after all contractual claimants havebeen paid. This "residual" right is given weight by companiesfocusing the corporate objective on shareholder value.
Associatedwith the US, Canada, the UK and Australia, this view of thecorporate governance objective is generally justified on thefollowing grounds:. Accountability to shareholders provides a single measurableobjective that avoids the risk of diffusing the accountability ofmanagers and directors. If managers and directors are accountableto a whole range of stakeholders, almost any action can bejustified as in the interest of some group of stakeholders, andthis gives managers and directors unfettered discretion.
Focusing on long-term shareholder value encourages investmentcapital to be put to the most efficient economic use from amarket perspective and this should benefit society broadly. In advising clients on how to reconcile the two approaches,in-house counsel should bear in mind that, although muchideological debate has arisen about which of the two descriptionsof the corporate objective should prevail, as a practical matterthe two concepts do not present inherent conflicts except whenposed in the extreme.
Generally, viewed in the long term,stakeholder and shareholder interests are not mutually exclusive. Corporations do not succeed by consistently neglecting theexpectations of employees, customers, suppliers, creditors, andlocal communities, but neither do corporations attract necessarycapital from equity markets if they fail to meet shareholders'expectations of a competitive return. In the extreme situations in which the short-term interests ofvarious stakeholders collide, a clear understanding of who legalduties are owed to assists boards and managers to take necessary,timely, but difficult actions.
The importance of corporate governance. Nomatter what view of the corporate objective is taken, effectivegovernance ensures that boards and managers are accountable forpursuing it. The role of corporate governance in making sure thatboard and management are accountable is of broad importance tosociety for a number of reasons.
Effective corporategovernance:. Promotes the efficient use of resources both within thecompany and the larger economy. Debt and equity capital shouldflow to those corporations capable of investing it in the mostefficient manner for the production of goods and services most indemand, and with the highest rate of return. In this regard,effective governance should help protect and grow scarceresources, therefore helping to ensure that societal needs aremet. In addition, effective governance should make it more likelythat managers who do not put scarce resources to efficient use,or who are incompetent or at the extreme corrupt, arereplaced.
Assists companies and economies in attracting lower-costinvestment capital by improving both domestic and internationalinvestor confidence that assets will be used as agreed whetherthat investment is in the form of debt or equity. Althoughmanagers need to have latitude for discretionary action if theyare to innovate and drive the corporation to competesuccessfully, rules and procedures are needed to protect capitalproviders, including:.
Assists in making sure that the company is in compliance withthe laws, regulations and expectations of society. Effectivegovernance involves the board of directors ensuring legalcompliance and making judgments about activities that, whiletechnically lawful in the countries in which the companyoperates, may raise political, social or public relationsconcerns.
Provides managers with oversight of their use of corporateassets. Corporate governance may not guarantee improved corporateperformance at the individual company level, as there are toomany other factors that impact on performance. But it should makeit more likely for the company to respond rapidly to changes inbusiness environment, crisis and the inevitable periods ofdecline.
It should help guard against managerial complacency andkeep managers focused on improving firm performance, making surethat they are replaced when they fail to do so. Is closely related to efforts to reduce corruption inbusiness dealings. Although it may not prevent corruption,effective governance should make it more difficult for corruptpractices to develop and take root, and more likely that corruptpractices are discovered early and eliminated.
Effectivegovernance is a check on the power of the relatively fewindividuals within the corporation who control large amounts ofother people's money see www.
Titles in this series
EC, , V 4 , 37Corporate governance practices vary across nations andindividual companies. This variety reflects not only distinctsocietal values, but also different ownership structures,business circumstances and competitive conditions. It alsoreflects differences in the strength and enforceability ofcontracts, the political standing of shareholders anddebt-holders, and the development, and enforcement capacity, oflegal systems.
In developed countries, the discussion on how to improvecorporate governance tends to assume that the following are inplace:. Well-developed and well-regulated securities markets. Laws that recognise shareholders as the legitimate owners ofthe corporation and require the equitable treatment of minorityand foreign shareholders. Enforcement mechanisms through which these shareholder rightscan be protected. Securities, corporate and bankruptcy laws that enablecorporations to transform to merge, acquire, divest anddownsize and even to fail.
Anti-corruption laws to prevent bribery and protectionagainst fraud on investors.
An experienced accounting and auditing sector. Significant corporate disclosure requirements. In addition, developed countries are also more likely to havewell-developed private sector institutions, such as:. Organisations of institutional investors. Professional associations of directors, corporate secretariesand managers. Rating agencies, security analysts and a sophisticatedfinancial press.
Conversely, many developing and emerging market nations havenot yet fully developed the legal and regulatory systems,enforcement capacities and private sector institutions requiredto support effective corporate governance. Therefore, corporategovernance reform efforts in these countries tend to focus on thefundamental framework. Reform needs vary, but often include:. Stock exchange development. The creation of systems for registering share ownership.
The enactment of laws for basic minority shareholderprotection from potential self-dealing by corporate insiders andcontrolling shareholders. The education and empowerment of a financial press. The improvement of audit and accounting standards.
A change in culture and laws against bribery and corruptionas accepted ways of doing business. In addition to differences in the development of legal andregulatory systems and private institutional capacity, nationsdiffer widely in the cultural values that mould the developmentof their financial infrastructure and corporate governance.
Inpractice, international agreement on a single model of corporategovernance or a single set of detailed governance rules is bothunlikely and unnecessary. Even among fairly similar systems, likethe US and the UK, fundamental distinctions remain that areunlikely to be resolved.
The globalisation of corporate governance
One of the most obvious distinctions,for example, is how business managers are kept in check. In theUK like other European nations , regulation plays an importantpart in the process. In the US uniquely , regulation focusesprimarily on disclosure obligations and significant reliance isplaced on shareholder derivative litigation claims brought onbehalf of the company and class actions as enforcementmechanisms. However, the reality of the demands of global capital marketshas led to some international consensus on the basics ofeffective corporate governance.
Copies of thereport can be requested from www. The Millstein Report focused on "what is necessary by way ofgovernance to attract capital.