Tuesday, September 29, 2009

Towards evolving Global Corporate Governance Standards

In a recent article, Mr. Umakanth drew a distinction between ‘insider’ and ‘outsider’ models of corporate governance, and argued that "...the current regime on corporate governance has been transplanted from jurisdictions which display diffused shareholding and hence is inappropriate to the Indian regime which is dominated by promoter-controlled companies. What is necessary is a paradigm shift in measures to address governance problems pertaining to controlled companies…"
In this context, a recent paper by Prof. Lucien Bebchuk and Prof. Assaf Hamdani titled “The Elusive Quest for Global Governance Standards” makes for interesting reading. In the paper, the authors recognise that "In the United States and the United Kingdom, most public companies do not have a controlling shareholder. In most other countries, companies with a controller dominate…" They then argue that current models for assessing corporate governance structures fail to take into account these differences in ownership structures.
The paper goes on to propose two different models in cases for evolving global standards for assessing the governance of corporations. The models are based on differences in companies which have a controlling shareholder, and companies which do not have one; but is perhaps relevant even when not an ‘individual’ but a ‘family’ is the effective controlling shareholder.
The abstract of the article is as follows:
"Researchers and shareholder advisers have devoted much attention to developing metrics for assessing the governance of public companies around the world. These important and influential efforts, we argue, suffer from a basic shortcoming. The impact of many key governance arrangements depends considerably on companies’ ownership structure: measures that protect outside investors in a company without a controlling shareholder are often irrelevant or even harmful when it comes to investor protection in companies with a controlling shareholder, and vice versa. Consequently, governance metrics that purport to apply to companies regardless of ownership structure are bound to miss the mark with respect to one or both types of firms. In particular, we show that the influential metrics used extensively by scholars and shareholder advisers to assess governance arrangements around the world—the Corporate Governance Quotient (CGQ), the Anti-Director Rights Index, and the Anti-Self-Dealing Index—are inadequate for this purpose. We argue that, going forward, the quest for global governance standards should be replaced by an effort to develop and implement separate methodologies for assessing governance in companies with and without a controlling shareholder. We also identify the key features that these separate methodologies should include, and discuss how to apply such methodologies in either country-level or firm-level comparisons. Our analysis has wide-ranging implications for corporate-governance research and practice."
The article has been posted on SSRN, and can be downloaded from this link.

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