SHOULD CG PROVISIONS VARY BY COUNTRY?

Corporate governance provisions varying by country

There is a debate about the extent to which corporate governance provisions (in the form of either written codes, laws or general acceptances) should be global or whether they should vary to account for local differences. 

In general terms, corporate governance provisions vary depending on such factors as local business culture, businesses’ capital structures, the extent of development of capital funding of businesses and the openness of stock markets. In Germany, for example, companies have traditionally drawn much of their funding from banks thereby reducing their dependence on shareholders’ equity. Stock markets in the Soviet Union are less open and less liquid than those in the West. In many developing countries, business activity is concentrated among family-owned enterprises.

Against the view that corporate governance provisions should vary by country

1. Although business cultures vary around the world, all business financed by private capital have private shareholders. Any dilution of the robustness of provisions may ignore the needs of local investors to have their interests adequately represented. This dilution, in turn, may allow bad practice, when present, to exist and proliferate.

2. Some countries suffer from a poor reputation in terms of endemic corruption and fraud and any reduction in the rigour with which corporate governance provisions are implemented fail to address these shortcomings, notwithstanding the fact that they might be culturally unexpected or difficult to implement.

3. In terms of the effects of macroeconomic systems, this view ignores the need for sound governance systems to underpin confidence in economic systems. This is especially important when inward investment needs are considered as the economic wealth of affected countries are partly underpinned by the robustness, or not, of their corporate governance systems.

Supporting the view that corporate governance provisions should vary by country

1. Where local economies are driven more by small family businesses and less by public companies, accountability relationships are quite different and require a different type of accounting and governance.

2. There is a high compliance and monitoring cost to highly structured governance regimes that some developing countries may deem unnecessary to incur.

3. There is, to some extent, a link between the stage of economic development and the adoption of formal governance codes. It is generally accepted that developing countries need not necessarily observe the same levels of formality in governance as more mature, developed economies.

4. Some countries’ governments may feel that they can use the laxity of their corporate governance regimes as a source of international comparative advantage. In a ‘race to the bottom’, some international companies seeking to minimise the effects of structured governance regimes on some parts of their operations may seek countries with less tight structures for some operations.