In the contest between three resolutely different approaches to corporate governance in the Anglo-American, European and Asia-Pacific models, the question arises: is one system more robust than the others and will this system prevail and become universal? The answer to this question appeared straightforward in the 1990s. The US economy was ascendant, and the American market-based approach appeared the most dynamic and successful. Functional convergence towards the market based system seemed to be occurring inexorably driven by forces such as:
- increasingly massive international financial flows which offered deep, liquid capital markets to countries and companies that could meet certain minimum international corporate governance standards;
- growing influence of the great regional stock exchanges, including the NYSE and NASDAQ, London Stock Exchange, and Euro next where the largest corporations in the world were listed regardless of their home country;
- developing activity of ever-expanding Anglo-American based institutional investors, advancing policies to balance their portfolios with increasing international investments if risk could be mitigated;
- expanding revenues and market capitalization of multinational enterprises (predominantly Anglo-American corporations, invariably listed on the New York Stock Exchange even if European based) combined with a sustained wave of international mergers and acquisitions from which increasingly global companies were emerging;
- accelerating convergence towards international accounting standards; and a worldwide governance movement towards more independent auditing standards and rigorous corporate governance practices.
Together these forces have provoked one of the liveliest debates of the last decade concerning the globalization and convergence of corporate governance Globalization affects the corporate governance reform agenda in two ways. First, it heightens anxiety over whether particular corporate governance systems confer competitive economic advantage. As trade barriers erode, the locally protected product marketplace disappears. A country’s firms’ performance is more easily measured against global standards. Poor performance shows up more quickly when a competitor takes away market share, or innovates quickly. National decision makers must consider whether to protect locally favored corporate governance regimes if they regard the local regime as weakening local firms in product markets or capital markets. Concern about comparative economic performance induces concern about corporate governance. Globalization’s second effect comes from capital markets’ pressure on corporate governance. First, firms have new reasons to turn to public capital markets. High tech firms following the US model want the ready availability of an initial public offering for the venture capitalist to exit and for the firm to raise funds. Firms expanding into global markets often prefer to use stock, rather than cash, as acquisition currency. If they want American investors to buy and hold that stock, they are pressed to adopt corporate governance measures that those investors feel comfortable with. Despite a continuing bias in favor of home-country investing, the internationalization of capital markets has led to more cross-border investing. New stockholders enter, and they aren’t always part of any local corporate governance consensus. They prefer a corporate governance regime they understand and often believe that reform will increase the value of their stock. Similarly, even local investors may make demands that upset a prior local consensus. The internationalization of capital markets means that investment flows may move against firms perceived to have sub optimal governance and thus to the disadvantage of the countries in which those firms are based.
In the inevitable contest between the insider, relationship based, stakeholder oriented corporate governance system and the outsider, market-based, shareholder value oriented system, it is often implied that the optimal model is the dispersed ownership with shareholder foci for achieving competitiveness and enhancing any economy in a globalize world. The OECD, World Bank, IMF, Asian Development Bank and other international agencies, while they have recognized the existence of different governance systems and suggested they would not wish to adopt a one-size-fits-all approach, have nonetheless consistently associated the rules-based outsider mode of corporate governance with greater efficiency and capacity to attract investment capital, and relegated the relationship based insider mode to second best, often with the implication that these systems may be irreparably flawed. The drive towards functional convergence was supported by the development of international codes and standards of corporate governance.
The vast weight of scholarship, led by the financial economists, has reinforced these ideas to the point where they appeared unassailable at the height of the new economy boom in the US in the 1990s (which coincided with a long recession for both the leading exponents of the relationships based system, Japan and Germany), supporting the view that an inevitable convergence towards the superior Anglo-American model of corporate governance was occurring. This all appeared an integral part of the irresistible rise of globalization that was advancing through the regions of the world in the late 1990s and early 2000s, with apparently unstoppable force. Economies, cultures, and peoples increasingly were becoming integrated into global markets, media networks, and foreign ideologies in a way never before experienced. It seemed as if distinctive and valued regional patterns of corporative governance would be absorbed just as completely as other cultural institutions in the integrative and homogenizing processes of globalization. The increasing power of global capital markets, stock exchanges, institutional investors, and international regulation would overwhelm cultural and institutional differences in the approach to corporate governance.
Yet there is a developing literature comparing different models of capitalism from alternative analytical frameworks highlighting the nature and extent of diverse forms of capitalism, their relative strengths and weaknesses, and the prospects for institutional diversity when confronted with growing pressures for international economic integration (Deeg and Jackson 2006). The varieties of capitalism thesis elaborated by Hall and Skokie (2001) adopts a firm centered approach focusing on the incentives for coordination; a wider typology of governance mechanisms in terms of social systems of production is offered by Holing and Boyer (1997); and a national business systems approach of Whitley (1999) examines the internal capacities of business firms. Just as there are many countries that continue to value greatly the distinctions of their culture and institutions, they would not wish to lose to any globalize world, people also believe there are unique attributes to the different corporate governance systems they have developed over time, and are not convinced these should be sacrificed to some unquestioning acceptance that a universal system will inevitably be better. The field of comparative corporate governance has continued to develop however, and a different and more complex picture of governance systems is now emerging. The objectives of corporate governance are more closely questioned; the qualities of the variety and relationships of different institutional structures are becoming more apparent; the capability and performance of the different systems more closely examined; and different potential outcomes of any convergence of governance systems realized. While capital markets have acquired an apparently irresistible force in the world economy, it still appears that institutional complementarities at the national and regional level represent immovable objects.