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In accordance with provided by UK Committee on the Financial Aspects of Corporate Governance: “Corporate governance is the system by which companies are directed and controlled” (Cadbury Committee 1992,). The significance of corporate governance for the stability and equity of society is captured in the following broader definition of the concept: Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. (Cadbury 2000, 4)[i].

The Organization for Economic Co-operation and Development (OECD) proposed a broader and more responsible definition and purpose of corporate governance when it first published the OECD Principles of Corporate Governance: A good corporate governance regime helps to assure that corporations use their capital efficiently. Good corporate governance helps, too, to ensure that corporations take into account the interests of a wide range of constituencies, as well as of the communities in which they operate, and that their boards are accountable to the company and to the shareholders. This, in turn, helps to assure that corporations operate for the benefit of society as a whole. It helps to maintain the confidence of investors—both foreign and domestic—and to attract more “patient” long term capital[ii].

The Anglo-American approach to corporate governance is the transformation of corporate governance firmly associated with market-based institutions, in Europe more managerial forms of governance have continued, and in Asia strong elements of family ownership have survived intact (ICGN 2014)[iii].

There is a distinction between two aspects of corporate governance: The first set of definitions concerns itself with a set of behavioral patterns: that is, the actual behavior of corporations, in terms of such measures as performance, efficiency, growth, financial structure, and treatment of shareholders and other stakeholders. The second set concerns itself with the normative framework: that is, the rules under which firms are operating—with the rules coming from such sources as the legal system, the judicial system, financial markets, and factor (labor) markets[iv].

All systems of corporate governance have serious weaknesses as well as strengths, and this includes the Anglo-American system, which has been at the epicenter of major corporate governance collapses in the twenty-first century, including the global financial crisis. European and Asia-Pacific governance systems demonstrate strengths and weaknesses too. While economic growth has slowed in Europe, the more inclusive and responsible system of corporate governance practiced there has often maintained more cohesive economies and societies. In the Asia Pacific, and throughout the more dynamic emerging markets, despite ostensibly weaker corporate governance systems, high rates of economic growth have been consistently sustained[v].

Researchers have made a distinction between convergence in form and convergence in function (Gilson, 2004). Convergence in form relates to increasing similarity in terms of legal framework and institutions. Convergence in function suggests that different countries may have different rules and institutions but may still be able to perform the same function such as ensuring fair disclosure or accountability by managers[vi].

There is a question can product market integration have an effect on governance similar to financial market integration? The opinion on this issue is somewhat divided, but proponents of convergence argue that, in the long run, product market integration and the resulting global competition will have the same effect (Khanna and Palepu, 2004)[vii]. Corporate governance is viewed as a technology or a new innovation, and in an era of global competition firms have no alternative but to adopt the most innovative practice or face competitive failure. Focusing on the patterns of diversification strategies across industries, Kogut, Walker and Anand (2002) present an argument that technological and market forces compel firms to adopt similar strategies across countries. In a similar vein, different governance systems are seen as engaged in Darwinian competition (Kester, 1997). Nations and firms that are following suboptimal governance systems will be less efficient and will fail or will have to adopt the more efficient governance system. In either case, the result is convergence[viii].

Tightening corporate governance means explicitly increased MNC compliance with specific standards and practices recommended in national and international governance codes and guidelines. Tightening involves reducing entrenchment and discretion of top managements and governing boards and increasing both formal and willing compliance of executives and directors with internal and external governance codes and guidelines[ix]. Complying with best governance prescriptions should be a source of competitive advantage such that no MNC can afford to fall too far behind in the adoption of best governance prescriptions.

Increasing regulatory pressures are driven by the series of company scandals and industry and financial crises since the 1980s. In the wake of recent corporate scandals (Harris, 2008) in various countries, U.S. stock exchanges strengthened listing requirements. Scandals destroyed the reputation capital of the corporate sector (Fombrun, 2006), and precipitated the Sarbanes–Oxley Act of 2002 (SOX)[x]. The EU nations have experienced since the 1990s strong pressures for more effective governance along U.S. and U.K. lines (Perry and Rehman, 2006).




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