EXECUTIVE SUMMARY
7. DIVERGENCE WITHIN A CONVERGING TREND: A TENTATIVE FRAMEWORK FOR FURTHER ANALYSIS AND DISCUSSION
Moreover, governance recommendations for listed companies are often used as benchmarks for non-listed enterprises and self-regulation often directly or indirectly leads to legal rules (migration path). Such rules can become applicable to all types of corporations, whether listed or not. Also from this perspective, we think that it is not allowed to ignore private companies, when studying the future outlook of corporate governance.
Minimal recommendations to safeguard good corporate governance.
Notwithstanding the need for flexibility and diversity to cope with the specific needs of different types of firms (see Chapter 5), a minimal harmonisation will be necessary to agree upon the specific requirements that must guarantee good corporate governance. The inquiry showed that accountability, transparency and ethical behaviour of the board of directors are the central themes, a corporate governance code must contain. This is confirmed by almost three out of four participants. Especially the business community seems to be in favour of limiting corporate governance guidelines to these minimal recommendations.
To enforce good corporate governance, some urge the development of a European Securities and Exchange Commission, while others rely on the free market as the best monitoring authority. Not surprisingly, the business community supports a market enforcement regime whereas academics believe a further development of a system with national authorities and mutual recognition should be encouraged.
7. DIVERGENCE WITHIN A CONVERGING TREND: A TENTATIVE
Corporate financial governance focuses on the structures and processes necessary to pursue shareholder value where the firm and its directors are instrumental to shareholder value maximisation. Traditionally, governance attention focussed on conformance issues. To avoid 'box ticking' with some 'superficial' or 'cosmetic' adaptations, emphasis should equally be placed on performance issues.
The challenge for corporate governance in general and board members more specifically is to balance the interests of all stakeholders involved. In an information and knowledge society a firm's reputation, its intellectual capital and its license to operate become largely dependent on the respect for the complex balance of stakeholders' interests. As a consequence, the content of corporate governance should be broadened to 'socially responsible corporate governance'. Socially responsible corporate governance considers the firm as a long-term partnership of shareholders and other stakeholders. The firm optimises the long-term return to shareholders whilst satisfying the legitimate expectations of stakeholders.
7.2 From convergence in geographic terms to convergence in corporate terms The dominant configuration of governance structures, also called the dominant firm logic, forms the reference frame for the development of national laws, regulations and self-regulatory recommendations. This dominant firm logic explains to a large extent why the global capital markets, headed by Anglo-American countries, opt for the "Berle & Means" model of the listed company with a dispersed shareholding as the dominant firm logic. On the contrary, the Continental European countries have each their dominant firm logic. Consequently, no 'single European market' exists for corporate governance, company law and capital market regulations.
The internationalisation of business and finance makes the discussion on corporate governance more necessary than it already is. Since an increasing number of firms operate at an international level, it becomes difficult to rely solely on the national reference framework for corporate governance. The more business groups compete for capital, labour and market share on the global market place, the more they will have to adopt the rules of the global market game. The more their local environment differs from this global business environment, the more difficult it will become to cope with these diverse rules and regulations.
Applied to the corporate governance debate, a basic set of corporate governance principles are universal making global convergence at this level desirable while at the level of the firm, the fundamental role of the firm is defined quite different from one political and economical party to another. As long as these differences exist, variability will reign at the level of corporate responsibilities. Notwithstanding these different approaches, corporate financial governance should be expanded toward socially responsible corporate governance to answer to the modern needs and expectations of society at large.
7.3 Firm taxonomy of corporate governance models
To account for the differences across firms in terms of corporate governance, we introduced a firm taxonomy based on a set of potential corporate governance problems and potential remedies. The traditional firm types include the private family-owned business, firms with concentrated ownership of controlling blockholders (i.e. public or private shareholders) and the autonomous firm (i.e. the
"Berle & Means" type of dispersed shareholders or autonomy based on a non-voting share system).
Besides these traditional types, new formats deserve academic and business attention. Institutional Investor Governance copes with agency problems within institutional investors. The Silicon Valley Model may suffer from the lack of arms- length financing, interlocking governance roles and behaviour as blockholder. And finally, the concept of the network organisation does not start from the 'legal' concept of a 'company', but from the strategic concept of the value chain. In fact, it focuses more on the strategic and stewardship perspective of corporate governance.
As such it is no longer only about 'corporate' governance, but also about 'system' governance.
7.4 From corporate governance to societal governance
Surprisingly, 'non-business' organisations seem to escape from the global trend to impose tougher corporate governance principles on the business world. It is striking that institutional investors, supra-national organisations, non-governmental organisations, state-owned enterprises and other governmental organisations do not face or practice hard governance rules. Potential agency conflicts and control bias, if any, can exist because they escape market disciplinary measures and tough rules of control, accountability and disclosure. The more these 'non-market' organisations become important, the more they will need harder governance rules and monitoring, hereby enlarging the spectrum of governance from corporate to societal governance.
7.5 Monitoring corporate governance
Corporate governance experts and working groups have mainly focused on best practices and corporate governance principles and recommendations. The study of corporate governance monitoring did not receive the attention it should, especially if self-regulation or soft law is considered the preferred route to better corporate governance.
The numerous suggestions cite the securities markets and the institutional investors as effective monitors. However, institutional investor monitoring is not sufficient to reach the goal of a balanced attention for all shareholders and stakeholders. In this respect an independent board and independent auditors get a very crucial role to play. Also, the monitoring role of the owner-entrepreneur is
often overlooked because research is often based on the "Berle & Means"-type of firms.
Given the lack of disciplinary market mechanisms, the monitoring of non- commercial organisations will be a though task. May be that the media can play an important role in scrutinising these organisations and fostering good governance practices. The media indeed have proven to be vigilant watchers of corporate governance practices.
When discussing optimal monitoring one also needs to look into the approach used. We already warned for a pure box ticking approach. The issues, corporate governance has to tackle, are so important, but at the same time so complex, that a pure formal system can never reach the necessary changes in practice. It is clear that substance must prevail over form. It is without any doubt that emphasis should be placed on changing the attitude and behaviour of business leaders.
7.6 From shareholder activism to shareholder monitoring: rehabilitation of the role of the owner-entrepreneur
In the corporate governance literature, the concept of shareholder activism is associated with the growing interference of institutional investors in the governance of firms. This certainly is correct, in as far as the macro impact and public impact of shareholder activism is concerned. However, looking at the micro- and private level of the individual company, it may not be ignored that, over time, the most active shareholders always have been the 'reference shareholders', the 'blockholders' or the 'owners' of the company. More active monitoring by institutional investors is becoming a hot issue in today's corporate governance discussions. Institutional shareholders, especially the larger ones, who were at the origin of shareholder activism, are 'turning up the heat'. More and more, institutional investors realise that shareholder activism through active participation in shareholder meetings, or through one-to-one meetings with management is no guarantee for efficient and effective monitoring. They become interested in more active ways of monitoring, such as taking on responsibilities as non-executive directors. In doing so, they indirectly subscribe to the benefits of the blockholding model. Indeed, this model is typically characterised by a very active monitoring by the reference shareholder(s).
The question remains to what extent this return to the roots of the owner-monitor rings in the end of the autonomous publicly traded company. However, doubts can be raised to what extent institutional shareholder activism is really able to replicate the blockholding-based governance systems and thereby fill the void in corporate monitoring.