EXECUTIVE SUMMARY
4. CONVERGENCE OR DIVERGENCE: EVIDENCE FROM THE CORPORATE GOVERNANCE LITERATURE
Based on a thorough analysis of a large number of publications and studies, we grouped the opinions of researchers into three categories226: the first group are those that believe in a convergence toward the market-oriented model. The second group opts for a convergence towards a hybrid corporate governance model. The third group comprises those that do not believe in global convergence but adhere to diversity of governance models.
4.1 Standard school
The Standard School believes that globalisation of the economy and capital markets will lead corporate governance systems to convergence to one standard model. What this standard model will look like is not straightforward. Two main variants are: the outsider system and its specific corporate governance system and a hybrid system based on the most successful elements of the insider and outsider system.
4.1.1 The market-oriented model as the basic reference model
The market-oriented Standard School believes that the evolutionary process of capital markets and listed companies will lead to one model: the market-oriented model. The Standard School is convinced that for the interests of society, the best corporate governance system is to make corporate managers accountable to only shareholders. Firms operating under the standard shareholder-oriented model seem to have major advantages as they have access to equity capital at a lower cost and more rapidly abandon inefficient investments. It is argued that while other models may demonstrate great efficiency, the ability of shareholder-oriented corporations to expand more rapidly, while having access to international equity markets, will create over time a general standard model that will win the competitive struggle.
The market-oriented Standard School identifies structural changes that bring corporations in Europe and Japan closer to this market-oriented model. They are convinced that the blockholder system will gradually disappear due to Anglo- American style of financial regulation, shareholding rights and enforceability in courts. According to this school of thought convergence into the direction of a
226 Most of the statements given in this overview do not express the points of view of the authors, but merely reflect the opinions of specific researchers, as mentioned in Chapter 2.
worldwide hegemony for market institutions is a certainty because only the market system reflects an efficient evolutionary process.
4.1.2 Convergence towards a hybrid corporate governance model
This Hybrid school also believes that convergence will take place due to global competition. But contrary to the market-oriented standard model, this school assumes that the two main corporate governance systems (the market-oriented system and the insider system) possess equal strengths so that each system can and should learn from the other. The hybrid Standard School is built on the idea of cross- reference, which supposes divisibility of corporate governance systems and transferability.
Several arguments are given to support the hypothesis of cross-reference with the insider system becoming more market-oriented and the Anglo-American having greater concentration of shareholding, so as to rely on a more stable longer-term commitment by shareholders. The failures of market systems can be ameliorated with devices from blockholder systems and devices from market systems can overcome the failures of the blockholding system.
Others see the knowledge society as the driving force behind the construction of a hybrid governance model. This implies a larger role of human capital so that the supremacy of financial capital and shareholders is no longer possible. Moreover knowledge workers and critical consumers will pressure companies to foster sustainable business practices instead of optimising short-term shareholder value.
In many different circles, examples can be found of a possible convergence into the direction of a hybrid system. Clear examples are the political programs of many governments throughout Europe, programs that focus on this hybrid 'middle' way.
4.2 The diversity school
This school does not believe in the superiority of the Anglo-American market- oriented system, nor do they they accept the cross-reference model, because they are convinced that corporate governance is a system that cannot transfer parts from other systems without breaking the equilibrium of the system itself. In contrast to both Standard Schools, the main hypothesis of the Diversity School is that instead of standardisation, differentiation is necessary.
The Diversity School rejects global convergence because each national governance system is a system with interdependencies and significant barriers to cross-reference. Different corporate governance systems have incentive structures that entail different trade-offs. These trade-offs delimit opportunities for productive cross-reference. Hence, converging initiatives (e.g. encouraging deeper trading markets in Europe or encouraging more blockholding in the U.S.) may lead to disappointing results.
4.2.1 Differentiation criteria
The Diversity School does not accept the idea of one global corporate governance system, because of the many differences across nations and industries.
A first hypothesis is that there is no one dominant system because different types of ownership and control are suited to different types of activities. Another hypothesis is that a firm needs different corporate governance structures and processes according to the phase of its life or development cycle. For example, large listed companies with dispersed shareholding need a governance system different from that for closed family businesses.
Selecting the right differentiation criteria essentially boils down to defining the diversity of solutions to cope with a great variety of possible governance problems and specific conflicts of interest. In fact, all constellations of ownership structure involve costs and benefits. Corporate governance codes and recommendations, as well as company law and capital markets law, should direct the corporate governance system to its optimal format and prevent abuses. In a modern society, the art of corporate governance is to strike a right balance between all relevant interests involved, to minimise the conflicts of interest and to guard that the interests of the firm (whatever they may be) are fostered.
4.2.2 Defining strategic choices and political priorities
Defining possible differentiation criteria is however only one part of the puzzle facing the Diversity School. We developed the hypothesis that corporate governance structures and systems matter for the realisation of corporate strategies. Since strategies are micro-decisions whereas the corporate governance structures largely depend on the macro-environment, reaching an optimal fit between the macro/national corporate governance environment and a micro (corporate) strategy becomes very important. Whereas global firms have more degrees of freedom to choose, and even to influence their macro governance environment, this is not the case for more 'local players'. Countries can create a competitive advantage for their firms by facilitating the corporate governance structures needed for their development. Some governance structures may limit strategic choices or even prevent the realisation of specific (growth) strategies. As we have seen, the degree to which the governance environment stimulates growth and innovation differs quite substantially from one system to another. The governance environment becomes a crucial element in the global competition. All countries will therefore have to reflect upon their competitive position on the spectrum of governance models. A very important question for the political scenery is what type of industries and what type of business policies they want to support or even to stimulate. As long as these questions are not univocally answered, European convergence, let alone global convergence, will not be possible.
5. CONVERGENCE OR DIVERGENCE: EVIDENCE FROM A STATISTICAL