The impact of globalization on corporate governance - Assignment Example

?The impact of globalization on corporate governance Businesses and corporate houses have a huge impact on a country’s economy. Apart from investing in government projects, corporate houses also carry the responsibility of proper conduct on their shoulders. Business houses need to behave ethically and this in turn will lead to economic development (O'Brien, 2001).Scandals and seismic events are sufficient to distort the beliefs of their shareholders, stakeholders and investors (Green & Gregory, 2005). About 1 million euro has been wasted in 13% of such fraud cases resulting in financial losses for the country (Wilhelm, n.d). Firms need to apply the sustainability principles in business management. Inclusion of social and environmental issues in business is possible through sustainability principles (D’Amato, Henderson & Florence, 2009). So corporate governance has now emerged as global responsibility. The effect of global approach to regulate corporate governance is debatable. Criticisms are there that such regulations carry no meanings as big corporate houses have the power to manipulate even the international policies owing to their size and their influence in markets. In recent times agencies such as Organization for Economic Corporation and Development (OECD) and Indian Labor Organization (ILO) have prepared a set of guidelines so as to regulate corporate governance. The activities and behavior of business houses are checked upon mainly on issues like environmental protection, human rights, safety and corruption (Kercher, 2006). In developing countries through effective corporate governance corporations can contribute largely in labor and environmental conditions of the country (Visser, 2004). Considering all these facts one can rate global approach to regulation highly important for corporate governance and the paper intends to addresses this issue through a series of case studies and analysis. Corporate governance helps companies and economies to bring in new investors and strengthen the foundation. It also makes a firm more competitive by improving its economic performance. Elimination of corruption and financial scandals is considered as the major objective of corporate governance. (Kuchta-Helbling & Sullivan, 2002).It has been widely accepted that a written code of conduct helps in improving corporate governance. United Kingdom has adopted such principles for governance in 2003 and has obtained amazing outcomes in 2005(Ford, 2008). These global rules include ability of mobilizing and monitoring of productive resources and their effective allocation (Isaksson, 1999). Separate committees should be set up for nomination, compensation and auditing. Transparency of the annual reports and accounting matters is now compulsory as per guidelines. This are now regulated through actuarial information in UK (Regulatory Strategy: Our role and Approach, 2009). The board of directors’ decision making should only be in favor of fulfilling company’s interests. The conduct of the directors is very crucial and their decisions matter a lot, especially in turnaround situations. The investors also bear similar responsibilities more in the area of risk management and when voting for vital issues. There is a need for the companies to realize their social and environmental responsibilities (Bowes, 1999). The importance of this global approach for proper conduct is to such an extent that corporate social responsibility has taken the name of globalization of business and economies. National economies have become enormously inter dependant in the areas of trade and finance. In some cases there has also been integration of macroeconomic policies (Guillen, 1999).In Asian countries before such global approach there have reports against the companies for unfavorable working conditions and employment of child labor. For developing countries overlapping public and private sector have prevented good corporate governance in the past (Kostyuk, Braendle & Apreda, 2007) Global agencies have worked quite hard in regulating corporate governance. They have held frequent conferences for regulating corporate governance. A global meeting on corporate governance held in 2003 deserves mention. There were 495 participants hailing from 74 countries. Enforcing regulations were considered necessary on areas like human rights, compensations, social and environmental issues (Petkoski & Twose, 2003). On July 3, 2006 meeting was held at ILO for discussing matters related to corporate responsibility (Clavet, De’Castro, Gravel, Henry, n.d) World Trade Organization established in 1995 has spearheaded in regulating corporate governance. It has allowed the countries to bring in investors from cross borders by eliminating entry barriers to trade and even protectionist barriers that gives protection to monopolies. They have also removed restrictions on foreign direct investment and foreign exchange. It has also enacted various anti-trust laws and has prohibited illegal practices in trade like dumping. Overall they have prioritized fair trade (Kuchta-Helbling & Sullivan, 2002). A Global agency named International Labor Organization (ILO) was set up in 1919 by United Nations to look upon matters related to labor. It has been operating across 178 member states. It focuses on employment related matters and advocates best possible wages, favorable working conditions and employee benefits. It appeals to the corporate houses to respect international standards (Kercher, 2006). In 1997 the Global Reports Initiative was established aiming to improve governance while focusing on reported information. This was done to achieve sustainability in reporting practices. A revised edition of the guidelines came out in 2006 and is being used by various businesses. They report on social, environmental and shareholders’ issues as per the guidelines (Kercher, 2006). Government along with non-governmental organizations and some stakeholders are playing a key role in improving Corporate Governance (Albareda, Lozano, Tencati, Midttun, Perrini, 2008) Adapted in 1976, the OECD guidelines are still serving to promote high standards of governance. Developed by OECD and non-OECD countries, the guidelines suggest distinction between state ownership and regulatory functions (OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2005). They provide a guide to business houses on how to maintain proper conduct in supply chain management, taxation, labor relations. The guidelines also maintain strict norms for anti corruption, human rights and consumer welfare. It has emphasized on facts like the right of shareholders, the role of stakeholders, equitable treatment of the shareholders, transparency and the duties of the board appointees. (Kercher, 2006). The Commonwealth Association for Corporate Governance (CACG) which is now operational the various member countries originated in 1998. It brought forward a set of guidelines that was aimed at promoting excellence in the area of corporate governance. It has received active support from another developmental organization, The World Bank as well as from the New Zealand Government. As per the rules of the association integrity and judgment should be injected within the corporations with the help of effective leadership. The appointment of board of directors should be done in a managed process so as to ensure that those elected have the capability of independent decision making. A careful monitoring is required during the implementation of business plans, policies and strategies. Effective communication with shareholders and stakeholders is required at a regular basis. This is important for identifying the companies’ internal and external stakeholders. The performance of each employee and even the directors should be accessed regularly. Apart from these there are various other rules and regulations in the CACG guidelines including those for technology and risk management. The main purpose of such rules is to help the corporate achieve the best business practices and behavior which will surely lead them to economic prosperity in the future (Bowes, 1999). In recent times World Bank has increased its programmes on corporate governance. Business organizations like US Chamber of Commerce and Center for International Private Enterprise (CIPE) has also rated the issue of corporate governance as their topmost priority. CIPE has also set up a group that concentrates only on Corporate Governance. In addition they are also looking upon the resources from corporate governance. Countries should always concentrate on setting up a healthy banking sector that will help in growth of stocks and corporate houses (Kuchta-Helbling & Sullivan, 2002). The New Capital Adequacy Framework has been proposed which is based upon transparency, supervisory review of processes and minimum capital requirements. The framework provides techniques which are quite flexible and helps in examining capital adequacy. It has also helped in accurate prediction of different underlying risks. This has allowed the banks to trace the amount of capital that would be required to cover those risks. The rules and procedures established facilitates in undertaking credit risks. The rules have also instructed to monitor each borrower effectively (Kuchta-Helbling & Sullivan, 2002). . In fact improper corporate governance can be attributed to the financial crisis across the Asian countries. The paper deals with various such cases to trace out the importance of global approach to regulate corporate governance. One can cite the case example of Asian Development Bank which has been troubled by improper governance in the past and now looking upon the matter seriously for economic prosperity. Established in 1966, this bank has been indulged in developmental activities, the chief one being poverty reduction. However improvement in performance was achieved only when the company diverted a lot of attention in corporate governance. The financial institution had invested hugely in some properly governed private firms and enterprises. Such multiple investments have resulted in good quality governance through establishment of a set of governing principles. This in turn has led in betterment of social and environmental development. Such an improvement has earned the bank an A rating by major rating agencies (Corporate Governance Principles, n.d). . Similar is the case of Hermes Pensions Management Company which is one of the largest fund managers in United Kingdom and which has its reputation for being one of the most well governed companies in UK. It has emphasized on governance in the past especially in exercising steward ship at companies. The companies here include those where it exercises on behalf of clients. This is to overcome the company’s problem of underperforming indices. The strategy adopted is long term holdings in active indexes. More than 2000 public companies including some Japanese firms are in company’s active holdings. Such holdings have resulted in better monitoring of company’s underperforming assets which has troubled it in the past. It has also led in realization of the values as a result of good stewardship. The company can now manage pension funds better and cater to the needs of the long term investors. This has purely been achieved through publication of the Combined Code of Governance which is recognized globally (Corporate Governance Principles, n.d). . This Combined Code of Governance has been recommended globally for all companies. The list of companies accepting this code includes organizations like Cadbury, Greenbury and they have been gifted with better performance. This code has established proper set of rules for voting and investors providing a standard approach to corporate governance. Such rules also have fair contribution in maximizing shareholder’s value and efficient structuring of capital (Corporate Governance Principles, n.d). These case examples do give a lot of importance to the role of globalization in regulating corporate governance. Apart from these case studies of the reputed companies statistical evidences are there to prove the importance of global approach in regulating corporate governance. This is proved through the table below which shows how regulation of corporate governance through global approach has led to increased foreign direct investment. The comparison has been for the years across 6 countries (Guillen, 1999). Table1: Performance of Foreign Direct Investment with globalization of corporate governance Source: Guillen, 1999 Significant result has been obtained for most countries particularly for South East Asian countries. This is obvious as effective governance freed them from the clutches of financial crisis (Guillen, 1999). Some countries are experiencing rise in financial assets owing to this globalization as shown in the diagram below: Figure 1: Column chart showing increase in financial assets with global regulation of corporate governance Source: Guillen, 1999 Here rise in financial assets has been shown as rise in percentage of total GDP taking into account mainly the United Sates and the European countries that have largely benefitted with this act of global regulation on corporate governance (Guillen, 1999). Such statistics can ensure the fact that corporate governance has improved with the global approach to regulation and they have achieved notable success in their businesses by maximizing shareholders. The improvement in stocks has been noted across various sectors at different rates in different countries. Such an improvement has been highlighted in the data below (Guillen, 1999): Figure 2: Column chart showing rise in corporate equity by types of shareholders Source: Guillen, 1999 This data highlights mainly 4 countries like USA, UK, Germany and France. The data observed for the years 1983, 1993 and 1996 has showed a rise in shareholders for almost all the sectors. The companies concerned with management of investment funds have emerged as a huge beneficiary. Such a point has previously been highlighted in the case study of Hermes Pensions Management Company (Guillen, 1999). Thus our findings have mainly been supportive of the fact that global approach to regulate corporate governance has benefitted all the corporate houses worldwide. But there have also been arguments against such global approach in regulating corporate governance. The arguments have been raised mainly on legal and political grounds. Such globalization has resulted in sudden acquisitions or hostile takeovers. Big firms have been trying to takeover some good governing firms only to improve their corporate governance. In some cases banking interests are hurt by such multinational tie ups (Guillen, 1999). A case example can be more helpful to illustrate this phenomenon. Countries like UK and USA have been continuously trying to acquire or merge with the German banks in order to improve their banking governance. This is due to the fact that German banks are far more superior when it comes to monitoring ability or the capacity to collect information. They are also better managers of risks and returns. But for improving UK or USA banking governance German banks cannot land up with less profit. So Germans banks will not go for a tie up and if there is forceful acquisition it will surely hurt their banking interests. In such cases such globalization of governance will adversely hurt the sectors in some countries and they will surely oppose such regulation in such cases (Guillen, 1999). Time series data is also available to show the number of hostile takeovers that has taken place over the years with emergence of globalization in the area of corporate governance. The issue is highlighted in the Area diagram below: Figure 3: Area block diagram showing the hostile takeovers with globalization of corporate governance regulation Source: Guillen, 1999 Here the diagram denotes the transaction value reached during those hostile takeovers as a percentage of world totals. Clearly the data reveals that such hostile takeovers as a whole have been continuously increasing over the years with regulation of corporate governance becoming a global phenomenon. The Countries with highest percentage of transaction value, in this case Australia (1.5 to 2.6) and Canada (11.6 to 14.6) emerge as the chief acquirers. The targets have been good governing firms who can improve their governance ability. The transaction value has been comparatively low in Asian countries (Guillen, 1999). Another ground on which this global Approach to corporate governance is criticized is purely a political aspect. A lot of political interference is encountered in matters of trade creation or trade diversion. Such formations of groups or unions for trade are a way of imposing global regulation in corporate governance. The apparent reason shown for such formation is maintenance f proper conduct of corporate houses taken to be a global responsibility. But there a lot of political motives behind such groups (Guillen, 1999). The case study of creation of European Union for trade can reveal political interferences in such globalization of governance. Political conflicts between member countries have come up as a barrier in the way of effective governance of the nations’ businesses. Such global regulations have failed to set up good standards of governance owing to these conflicts. Frequent disagreements among member states have hindered the process of good governance of corporate laws and practices. A proper code of conduct still needs to be set up among the European members in spite of hard work in last twenty five years. (Guillen, 1999). Another popular criticism against such global approach has been that it is paying too much attention in increasing companies shareholders and has ignored other important issues. They have not been such influential in case of social and environmental responsibilities (Guillen, 1999). Ethical issues also come up with the advent of globalization especially in cross cultural matters (Yucel, Elibol & Dagdelen, 2009). Conclusion The issue of corporate governance has gained a lot of importance in recent times. This is because corporations have realized the need to maintain a written code of conduct for good quality governance which would win the confidence of the shareholders and investors. For achieving financial stability Corporate governance is the key (Diplock, 2010). Rise in corruptions and financial scandals have created urgency for regulating corporate governance and global agencies have stepped forward to take this responsibility. These Global Agencies like World Bank, WTO, and ILO etc have worked hard to regulate corporate governance in terms of their established codes and frequently held conferences as highlighted in this paper. However the importance such a global approach to regulate corporate governance is debatable. Our findings and analysis have shown that such an approach has immense importance on regulating corporate governance through their guidelines. They have also helped the businesses achieve remarkable success in increasing investors and numbers of shareholders and also those enterprises in state of crisis. However the findings also reveal a negative aspect. 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