Maryam ahmed

F17_0850
chapter no 12
Corporate Governance in
International Perspective
BS (Accounting and Finance)7th
 Introduction
 Corporate governance is a huge discipline that is got influence from
different sciences including finance, economics, management etc.

 There are many aspects to the existence of firms, organizations and

corporations. The one important aspect that has taken center stage is
Corporate Governance. This is not least due to the many scandals that as
seen the biggest of firms declaring bankruptcy due to fraud, corruption,
embezzlement and mismanagement
The governance of corporations has extensive micro and macro
consequences along with approach. The micro level
consequence is that it aims to ensure that the corporation, as a
productive organization, functions in pursuit of its goals and
objectives while on the macro level it aims to efficiently and
effectively promote the allocation of the nation’s savings and
investment to its most productive use
Framework for Analysis: International
Corporate Governance
Three are various ways in which corporate governance are
considered. Some researchers define international corporate
governance it as “the study of relationships between parties with a
stake in the firm and how their influence on strategic corporate
decision making is shaped by institutions in different countries”. This
is why considering an international perspective on corporate
governance requires dealing with the overtime diversity (differences
and similarities) across countries shaped by the different institutions.
Micro Level Analysis
The micro approach to analyzing corporate governance with an
international perspective is concerned with whether or not the
similarities and differences in corporate governance mechanisms
across countries and continents results in any specific firm-level
outcomes, such as firm performance, stock market returns,
economic growth, inequality, innovation patterns, and so on.
Macro Level Analysis
Corporate governance mechanisms are economic and legal institutions
that can be altered through
political process (Claessens and Yurtoglu, 2013). This includes (Prowse,
1994); Denis and McConnell, 2003):
A. Internal Governance Mechanisms while there are several of these the
focus in this paper is on the following:
1. Ownership Structure (Ownership Concentration)
2. Boards of Directors (Board Composition and Size)
B. External Governance Mechanisms: the focus of this write up is
1. Institutional environments
2. The Takeover Market
3. Institutional Investors and Group Affiliation
Institutional environments: legal and regulatory
constraints
One of the most significant determinants of the observed diversity in corporate
governance mechanisms on an international level among countries is the
institutional factors as enshrined in the legal and regulatory frameworks of
individual countries. This is manifested in legal components such as
1) countries’ legal origins,
2) strength of countries’ formal legal right
3) Rights of creditors and shareholders (creditor rights, legal protection of
minority shareholders),
4)Degree of enforcement of formal rights (efficiency of debt enforcement, anti-
corruption)
5)The degree to which corporations listed on local stock exchanges have to
disclose relevant financial and other information disclosure requirements.
Shleife and Vishny (1997) in their research survey on corporate
governance argue that a negative correlation exist between the
strength of investor protection and the probability of management’s
expatriation of shareholder funds suggesting that legal origin and its
strength in a particular country does not necessarily translate into
better corporate governance. The reason given for this negative
correlation is that a weak legal shareholder protection can be
surmounted through concentrated shareholding.
The Takeover Market
Takeover is traditionally an Anglo-American corporate
mechanism to deal with the agency problem. It is thought to
discipline managers at inefficient corporations. The first
theoretical justification for takeovers was presented by Manne
(1965) who argued that the takeover market is an external
control mechanism over incumbent manager
 Takeover as a corporate governance mechanism was something
peculiar to the Anglo-American model which has been adopted by
the rest of the world.

 This is generally due to the concentrated nature of ownership

structures that dominates in most of the other systems of corporate
governance in operation in the world.
Institutional Investors and Group
Affiliation
Institutional investors and group affiliation is one of the
determinants of the difference in corporate governance
mechanisms among countries. It has being observed that
many countries have big industrial conglomerates/groupings
that are made up of several interrelated businesses
For example
 As of the end of 2004, institutional investors owned nearly 50 per cent
of all UK shares. They traditionally do not play an active role in
corporate governance because of their widely diversified portfolio but
have now been encouraged to become more actively involved by the
corporate governance reforms of the 2000s.

 Ownership by institutional investors is considered small and

insignificant in emerging markets and they have little control and
influence over the corporate governance mechanisms of corporations.
Corporate Ownership Structures
 The structure of corporate ownership is an important determinant
in international differences of corporate governance mechanisms
and models. Discussion on the structure of corporate ownership
generally focuses on the degree of ownership concentration and
the identity of majority shareholders/block holders.
 More concentrated corporate ownership structure would have the
necessary incentive and resources to influence the decision make
process of management.
Composition and structure of board of
directors
The structure of Board of Directors varies both within and among
countries. In several countries such as Germany, Brazil, South Africa,
China, Indonesia and Russia etc., a two-tier board of directorship is in
operation. This two-tier board separates the supervisory function and
the management function into two different bodies. Such systems
typically have a “supervisory board” composed of non-executive
board members and a “management board” composed entirely of
executives.
For example
InGermany Supervisory body “The Supervisory
Board” (Aufsichtsrat) is made of up of only non-
executive board members while the Management
Board (Vorstand) consists of only executive board
members.
 We start by examining what researches say about the effectiveness of
Board Composition and size on firm performance. Hermalin and Weisbach
(2003) investigate the relative proportion of outside directors and the size
of the board using U.S. data.
 They find that firstly a higher proportions of outside directors are not
associated with superior firm performance, but are associated with better
decisions concerning such issues as acquisitions, executive compensation,
and CEO turnover; secondly board size is negatively related to both general
firm performance and the quality of decision making; and lastly changes in
the board membership results in poor firm performance, CEO turnover,
and changes in ownership structure
The effect of the takeover market as a corporate governance
mechanism and its effect on firm performance have also being
investigated by Holmstrom and Kaplan (2001).
The research suggest the following:
1) Average announcement abnormal returns to target firm
shareholders are positive, while average abnormal returns to
acquiring firm shareholders are at best insignificantly different from
zero and are, in most studies, significantly negative;
2)The combined abnormal returns to a target and acquiring firm pair
are relatively small, but significantly positive;
3) Poorly performing firms are more likely to be targets of takeover
attempts and the managers of poorly performing firms are more likely
to be fired.
Conclusion
This chapter has followed a framework, present in research, and
the analysis is divided into Macro level and Micro level. The
macro level analysis describes the differences and similarities in
corporate governance mechanisms at the country level by
focusing on the aggregate differences in the systems of
corporate governance such as ownership patterns, board
structure, etc. While the micro level analysis is concerned with
whether or not the differences in corporate governance
mechanisms across countries results in any specific firm-level
outcomes, such as firm performance, stock market returns.