Thursday, January 10, 2008

Comparative Corporate Governance (Part I)

There have been some recent developments (particularly studies) in the area of comparative corporate governance that are noteworthy. Some of them concern India directly, while others are international but could provide valuable lessons for India.

1. Comparative Studies of Corporate Governance Across Countries

The Race to the Bottom blog (which is a US law professional – faculty – student collaboration) has announced a series called International Corporate Governance: Pedagogical and Practical Lessons that contains contributions from students providing insights into corporate governance in various countries.

As a first step, there are three posts (here, here and here) that deal with corporate governance in the United Kingdom, along with a comparison with the US position. The posts argue that shareholder rights are given greater importance in the UK than in the US (where the management and incumbent board of directors play a major role in company affairs with very limited rights available to shareholders).

The Indian position seems to be more akin to the UK position (if not for anything else, simply because India had largely adopted the scheme of the English company law when the Companies Act, 1956 was enacted).

2. (Gender) Diversity in Corporate Boardrooms

There has been a recent move towards diversity on corporate boards. This has been carried a step further, as the Economist recently reported in a piece titled Girl Power, when a law in Norway came into effect on January 1, 2008 that requires all public companies in Norway to ensure that at least 40% of its directors are women. The Government in Norway has taken the implementation of the law very seriously as well; defaulting companies are likely to receive severe sanctions, including possible dissolution.

This is indeed an important step as it is one of the first nations to legislate the need for diversity on corporate boards as a mandatory requirement. However, as the Economist article explains, such an idea is not one without difficulties in implementation in view of the absence of sufficient number of women directors who are capable of adequately discharging the roles demanded of them on boards.

Further, as this study by Lisa Fairfax points out, the costs board diversity appear to exceed the benefits. Here is the abstract of the paper:

“The Bottom Line on Board Diversity: A Cost Benefit Analysis of the Business Rationales for Diversity on Corporate Boards critically examines the business rationales for diversity in order to determine whether they can or should be used to encourage greater diversity on the boards of major corporations. The Article acknowledges the validity of some of the business rationales for diversity within corporations more generally, but questions whether those rationales apply with as much force in the context of corporate boards and the obligations board members undertake. On this point, the Article concludes that such rationales promise more, and in some cases significantly more, than directors of color can realistically deliver. The Article also concludes that while there may be practical reasons for relying on business rationales to encourage corporations to diversify, many diversity advocates have failed to analyze and appreciate the costs associated with adopting business rationales. In fact, these individual and societal costs, including the costs of marginalization and commodification, may outweigh the benefits of using market and economic rationales to justify board diversity.”
However, these are still early stages of evolution on the issue of boardroom diversity generally and gender diversity in particular, and there is surely a lot more debate that would follow.

3. India Tops in a Study on Corporate Governance in Asia

In a study titled Corporate Governance in Asia: Eight Case Studies by Robert W. McGee that has been posted on SSRN recently, India has been rated the highest in corporate governance among itself and Indonesia, Korea, Malaysia, Pakistan, Phillipines, Thailand and Vietnam. This hardly comes as a surprise for various reasons:

(a) India has been consistent in not only strengthening its corporate governance norms from a regulatory standpoint, but Indian corporates themselves have also been observing high levels of corporate governance practices.

(b) India has been a fast mover among Asian countries in establishing codes of corporate governance (starting from the CII Code on Corporate Governance in 1998 that companies began to follow voluntarily) whereas other Asian countries have largely turned their focus on corporate governance issues only after the turn of the century. For a brief analysis of the history of the corporate governance movement in India, a reference may be made to another paper titled The Regulatory Norms of Corporate Governance in India.

(c) Even in the World Bank’s Doing Business Report for 2008, among various criteria, India received its highest ranking (at 33) on the aspect of investor protection. India has been consistently well on this count even in the previous years.
I was somewhat intrigued by the selection of countries for the study on Corporate Governance in Asia (which essentially works on the back of previous studies conducted by the World Bank) because China, in spite of its dominance in the Asian and world economy, was not included in the study. In any event, China’s ranking when it comes to investor protection and corporate governance has not been very strong (the World Bank’s Doing Business Report for 2008 ranks China at 83). Similarly, Japan has also not been covered in the report.

More will follow on comparative corporate governance matters in a later post.

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