Sample of student paper: Diversity of corporate governance

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1.1 Basic concepts

1.1.1 Corporate governance

According to the World Bank corporate governance can be defined from two aspects, namely, corporation and public policy. Defining from the perspective of a corporation, corporate governance is the relations between owners, management board and other stakeholders (the employees, customers, suppliers, investors and communities) where emphasis is given to the board of directors to balance their interest to achieve long-term sustained value. And from a public policy perspective, corporate governance refers to providing for the survival, growth and development of the company and at the same time, its accountability in the exercise of power and control over companies (Fernando 2009, p. 143).

1.1.2 Diversity and corporate governance

Diversity refers to cultural, social and other identifiable differences among groups of people and between individuals (Schrumpf, Crawford & Bodine 1992, p. 34). According to Alexander Brink (2011, p. 22), different traditions, values, and objectives will undoubtedly produce different outcomes in governance, which will relate closely to the choices and preferences people exercise in engaging in business activity. If there is convergence of corporate governance, it could be a variety of different forms and it is likely there will be divergence away from the shareholder oriented Anglo-American model, as there will be convergence towards it.

1.1.3 Globalization and corporate governance

According to Jonathan Harris (2011), globalization could be referred as the progressive ordering of human activities into a single system. The term “progressive” contains a double sense: it means both to extend and to develop (i.e., to get better or to get worse). Based on the view of Thomas Clarke (2007, p. 229) globalization influences the forming of the corporate governance in two manners: first of all, it enhances the anxiety over the extent to which the specific corporate governance models confer competitive economic advantage; and secondly the trend of globalization would be the associated requirements for corporate governance. For example, when some local companies in Malaysia want to attract the risk investment from the US investors, they are under pressure to adhere to the corporate governance systems which are more closed with the US corporate governance model which is favorable and well received by the US investors.

1.1.4 Anglo-American corporate governance model

The so-called “Anglo-American model” of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders. Because of this, it is also known as “the unitary system”. Within this system, many boards include some executives from the company (who are ex officio members of the board). Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees (Cadbury 1992).

1.2 Contrasting corporate governance systems between developed and developing nations

1.2.1 Internal finance or external finance
According to Vasudha Joshi (2004, p. 85), there is a sharp difference between developed and developing countries in the usage of internal finance or external finance. Based on his views, firms in the developing countries use less internal finance. In external finance, macroeconomic factors decide whether they will lean on the side of borrowings or equity. It was found, in a comparative study of American and Indian firms’ finances, that the proportion of external equity was comparable in both and the difference boiled down to a lower use of internal finance and higher use of borrowing in Indian firm. And it is believed that the heavier reliance on the internal finance would strengthen the managerial discretion as the lender in general would request for more interest than because they have limited access to the internal information than the management of the company. This is in accordance with an earlier finding by International Finance Corporation (IFC) that internal finance ratio in developing countries are well below the levels of those in the developed countries which means that they (the developing countries) rely more heavily on external sources (Fung, Pei & Zhang 2006, p. 165).

1.2.2 National cultural differences and adoption of Anglo-American model

As known to us, the outsider system of corporate governance of the United States and the United Kingdom are among the longest established and have influenced much of the rest of the world. The Anglo-American outsider system has been adopted in many other countries including Australia and New Zealand, and it is the core of the agency theory and associated corporate governance principles and company law elaborated over the last century that has proved deeply influential in defining the activity and purpose of corporations internationally. Some of the central characteristics of the model are: diffuse equity ownership; shareholder interest orientation and stringent requirement for continuous disclosure to inform the market (Clarke 2007, p. 129). And studies have found out that different national culture tend to come with different degree to which their corporate governance models are similar with the Anglo-American model.

Professor Geert Hofstede conducted one of the most comprehensive studies of how values in the business sector are influenced by culture. He analyzed a large data base of employee values scores collected by IBM between 1967 and 1973 covering more than 70 countries, from which he first used the 40 largest only and afterwards extended the analysis to 50 countries and 3 regions. The values that distinguished countries from each other could be grouped statistically into four clusters. These four groups became the Hofstede dimensions of national culture: Power Distance (PDI), Individualism versus Collectivism (IDV), Masculinity versus Femininity (MAS), Uncertainty Avoidance (UAI). And the fifth dimensions called Long term orientation (LTO) was later added into the framework ( 2010). And it is well known that the scores in these five dimensions together well distinguish a national culture system from that of another nation.

And according to the findings by Thankom Arun and John Turner (2009, p. 28), they found out that the three most individualist cultures were Anglo-American, namely, the United States (score of 91), Australia (90) and United Kingdom (89); and in contrast East Africa scored 27 and West Africa scored 20 indicating that in these cultures collectivism was more culturally predominant. This indicates, for example, that we may expect to find more emphasis on value for individuals and in particular individual shareholders in the Anglo-American countries but more emphasis on value for society, and in particular local stakeholders in the West African and East African countries. Therefore we can see some kind of relationship between the national culture, in particular the dimension of Individualism versus Collectivism (IDV), with the adoption of Anglo-American model. This may also be understood in another way around: with the increasing trend of adopting the Anglo-American corporate governance model, there are more and more developing countries undergoing a national couture chances and one of these key changes is the changing towards a individualism which is obvious in case of China.

1.3 Effectiveness of corporate governance promotion

There are concerns over the effectiveness of corporate governance rules in transition economies, developing countries and many developed countries. According to the World Bank (2007) when the general enforcement environment is weak, few of the traditional corporate governance mechanisms are effective. In addition although many countries have adopted international financial reporting standards, but very few of them have made progress toward meeting nonfinancial disclosure standards, particularly with regard to ownership, control, and related-party transactions. In particular the World Bank pointed out that much more needs to be done to instill commitment to sound corporate governance at the national and firm levels in many developing countries.