Corporate Governance, Responsibility and Sustainability

Initiatives in Emerging Economies

Arindam Banik,Ananda Das Gupta,Pradip K. Bhaumik

• Editore: Palgrave Macmillan
• Anno: 2016
• ISBN:
  9781137361851
• Argomento: Business
• Categoria: International Business

Corporate Governance, Responsibility and Sustainability investigates various dimensions of corporate governance issues in key emerging economies such as China, India, Brazil, South Africa and Russia. The book explores a number of issues in the areas of corporate governance framework, market discipline and building an efficient, competitive market.

1

Introduction

Arindam Banik

It is often argued that a company’s board of directors is responsible for the company’s corporate practices, as it is up to the board to decide and establish suitable corporate governance values and structures, processes and practices within its business model. Thus, the aim of corporate governance as often understood is to ensure that companies that are not managed by their owners are run in the best interest of the shareholders. As agents, the board members and managers are responsible for protecting the principals’ (shareholders’) interests, and board members are in turn accountable to shareholders and the company. In a broader perspective, corporate governance is the set of processes, customs, policies, laws and institutions that affects the way in which a corporation is directed, administered or controlled in order to facilitate the interests of stakeholders such as employees, shareholders, customers and banks. Good corporate governance plays a vital role in underpinning the integrity and efficiency of financial markets. Poor corporate governance weakens a company’s potential and, at worst, can pave the way for financial difficulties and even fraud.

It is well known that no capitalist system is immune to greed, fraud and theft. However, the developed economies, because of their strong judiciary and alert regulating bodies, have a key advantage over the emerging economies. Still, episodes such as those of Enron, WorldCom and Madoff happen at almost regular intervals. Meanwhile, in emerging countries a poisonous mix of accounting opaqueness, regulatory laxity and judicial indifference constitutes a major roadblock to smooth development of capital markets, particularly when these countries invite greater participation from foreign investors.

For many, the scandals affirm the warning issued in 1776 by the economist Adam Smith:

The directors of [joint stock] companies, however, being managers rather of other people’s money than of their own, it cannot be well expected that they should watch over it with the same anxious vigilance [as owners] ... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. (Smith, 1910)

Heeding this fundamental wisdom, various regulatory agencies in several countries have turned to independent directors as important elements of legal and policy reform in the field of corporate governance. In the United States, insider-dominated boards have been rare for years and, although it is only since 2004 that the New York Stock Exchange (NYSE) has required that independent directors constitute a board majority in domestic companies, as of 2001 approximately 75% of NYSE-listed companies already had such majorities. In the wake of Enron and other corporate scandals, federal mandates have been necessary for listed companies under the Sarbanes–Oxley Act (SOA) in the United States. Britain’s own series of corporate scandals led to the Cadbury Report, which, along with subsequent similar reports and studies, recommended a greater role for outside and independent directors. More interestingly, in Japan the last decade has seen a number of corporate law reforms designed to enhance the role of directors and auditors not tied to management.

Likewise, the Security Exchange Board of India (SEBI) has made it mandatory for publicly listed companies to have some minimum number of independent directors on their boards. This may have two broad objectives: effective corporate governance and enhanced investor confidence. Indeed, the combined code on corporate governance of the UK’s Financial Reporting Council contains general principles and more detailed provisions relating to the corporate governance of listed companies. The code emphasizes the role and responsibilities of the non-executive directors, including the need for an independent board. These directors are expected not only to participate in committees – such as the audit, remuneration and nomination committees – but also to form the majority in such committees.

The increasing worldwide interest in independent directors has not gone unnoticed by Chinese policymakers (Clarke, 2006). Indeed, Chinese interest predated the corporate scandals that led to federal-level corporate governance reforms in the United States, possibly because of the many similar scandals that had already occurred among Chinese companies listed on one of the country’s two stock exchanges.¹ In August 2001, the China Securities Regulatory Commission (CSRC) attracted attention with the issuance of its Guidance Opinion on the Establishment of an Independent Director System in Listed Companies (Opinion).² Covering all companies listed on Chinese stock exchanges (but not Chinese companies listed overseas), the Opinion constitutes the most comprehensive measure taken to date by the CSRC or any Chinese governmental authority to regulate internal corporate governance through the institution of independent directors. Although this has been mooted largely as part of a solution to governance problems in listed companies, the problems in question are not necessarily unique to them. In fact, the government has abandoned traditional ways of managing state-owned enterprises due to two fundamental reasons that are the product of the influence of Chinese economic reform. These are: (1) increasing wealth that has made possible the accumulation of private assets on a scale too large to be managed by an individual owner; (2) corporate entities in one form or another that are run by professional managers who do not own the assets and yet are unconstrained by the disciplines that functioned reasonably well under the system of state planning. Thus, Chinese scholars and policymakers have been searching for new mechanisms of corporate governance and accountability, not just for listed companies, but for all concentrations of assets managed by non-owners.

Corporate governance models around the world

Corporate governance arrangements and institutions vary from one country to another and, in both developed and emerging economies, experience has shown that there is no single framework that is appropriate for all markets: they differ according to the level of capitalism in which they are embedded. The liberal model common in Anglo-American countries tends to give priority to the interests of shareholders, while the coordinated model in Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers and the community. The liberal model of corporate governance encourages radical innovation and cost competition, whereas the coordinated model of corporate governance facilitates incremental innovation and quality competition. Both models have their distinct competitive advantages, but in different ways (Ahmed et al., 2008).

Anglo-American model

In the United States the corporation is governed by a board of directors, which has the power to choose an executive officer, often known as the chief executive officer (CEO). The CEO, however, needs the board’s approval for certain major actions, such as hiring immediate subordinates, raising money, acquiring other companies and undertaking major capital expansions or other expensive projects. Duties of the board may include setting policy, decision-making and monitoring management performance or corporate control. The responsibility for selecting the board of directors rests with the shareholders. However, the bylaws of many companies make it difficult for all but the largest shareholders to have any influence over the formation of the board. Individual shareholders normally are not even offered a choice of board nominees. Other problems include questionable incentives granted to the board members, who then may become “owned” by the CEO. It has also been observed that board members often are themselves CEOs of other corporations, which may be seen as a conflict of interest. The United Kingdom has pioneered a flexible model of regulation of corporate governance known as “comply or explain”. This is a principle-based code that lists a dozen recommended practices, such as: the separation of CEO and chairman of the board; the introduction of a time-limit for CEO contracts; the introduction of a minimum number of non-executive (independent) directors; the designation of a senior non-executive director; the formation and composition of remuneration; audit and nomination committees and so on. Publicly listed companies in the United Kingdom have to apply those principles. Alternately, should these companies decide not to comply with any of the recommended practices, they have to explain and justify this decision in a designated part of their annual reports. The monitoring of those explanations, and their subsequent acceptance, are left to the shareholders of the respective organizations.

Non-Anglo-American model

In East Asian countries, family-owned companies dominate the market. They also dominate the Latin American model of corporate governance, including in Mexico as well as in South American economies such as Brazil and Argentina. The characteristics of this model are: (1) shareholders are the major stakeholders; (2) a small number of listed companies with an illiquid capital market where ownership and control are not frequently traded; (3) a high concentration of shareholding in the hands of corporations, institutions, families or government.

In 1999, the Organisation for Economic Co-operation and Development (OECD) published its Principles of Corporate Governance, the first international code of good corporate governance approved by governments (OECD, 2004).³ These principles focus on publicly traded companies and are intended to assist governments in improving the legal, institutional and regulatory framework that underpins corporate governance. The OECD principles also provide practical guidance and suggestions for stock exchanges, investors, corporations and other parties that have a role in the process of developing good corporate governance. They call for a stronger role for shareholders in a number of important areas, including executive remuneration and the appointment of board members. They also call on companies to make sure that they have mechanisms to address possible conflicts of interest and to recognize and safeguard the rights of stakeholders, and that there is a framework in which internal complaints can be heard, with adequate protection for individual whistleblowers. The principles stress the responsibilities of auditors to shareholders and the need for institutional investors acting in a fiduciary capacity (such as with pension funds and collective investment schemes) to be transparent and open about how they exercise their ownership rights. And they call on company boards to be truly accountable to shareholders and take ultimate responsibility for their firms’ adherence to a high standard of corporate behavior and ethics.

Rossouw et al. (2002) remind us that corporate governance requires companies to take responsibility for their impact on societies and on their shareholders. We may thus conclude that the rise to prominence of corporate governance has been accompanied by a rise to prominence in business ethics. It is imperative to mention here that the growing international and domestic interest in corporate social responsibility (CSR) stems largely from the concerns, held by many in every society, about the real and perceived effects of rapid globalization. This interest has been reflected in the expectation that globalization must proceed in a manner that supports sustainable development in all regions of the world. People insist that the activities of corporations should make a positive contribution, not only to the economic development and stability of the countries in which they operate, but also to the countries’ social and environmental development. Failure to respond satisfactorily to such an agenda will contribute to increased social tensions, environmental degradation and political upheavals. Good corporate conduct makes an important contribution to sustainable development in any community and thus goes a long way toward responding to the concerns that globalization raises. Many companies and business associations have recognized the importance of CSR. Not very long ago, the dividing line between business and society appeared to be clearly drawn. According to economist Milton Friedman, there is one and only one social responsibility of business: “to use its resources and engage in activities designed to increase its profits”. This view no longer prevails. The CSR agenda is a complex one, requiring cooperation among a wide variety of stakeholders to be addressed effectively. Improved dialogue between the private and non-governmental sectors is one positive pattern emerging from recent corporate social-responsibility trends. While early relationships were often characterized by mistrust and misunderstandings that fed a cycle of opposing actions and reactions, today stakeholders are increasingly recognizing the value of multi-sector dialogue or partnerships to achieve substantive, long-term reform. Such a dialogue can facilitate a better understanding of the expectations and concerns of key stakeholders, and it can also act as a forum where debates over differences are more about identifying mutually acceptable solutions and practical implementation steps than reiterating entrenched, non-retractable positions. Forward-looking companies and NGOs are working with their stakeholders and, in the process, are benefiting from the expertise of all involved. Responsible development brings major challenges, and no one stakeholder is capable of adequately responding to them alone. The international community has policy tools to influence business activity within and between nations, and to help ensure that globalization proceeds in a way that benefits all. These tools include legislation and regulatory frameworks, voluntary compliance with an agreed set of standards monitored by a third party, or self-regulation by businesses, often in conformance with voluntary codes of conduct.

Balancing corporate investment with community investment is the way of the future. With growing public interest and concern regarding the sustainability of communities as globalization deepens, it will be necessary to show that the nations are working together to ensure that the activities of the business community make a positive contribution to the communities in which they do business.

Structure of the book

This book discusses the historical background of corporate governance issues in key emerging economies. This discussion is particularly important in the context of globalization – with its attendant massive changes in regulation and in redistribution of power from state to independent organizations –as well as in the context of technology and the social and cultural fronts. After the present brief introduction, Chapter 2 discusses the corporate governance framework in China. Needless to mention here, that market discipline is still developing in China. Hence, the role played by the formal legal and regulatory framework remains essential for building an efficient and competitive capital market. Chapter 3 documents the various reforms suggested by various bodies in recent times to strengthen corporate governance norms and processes; and it also documents the changes in laws, rules and regulations, particularly in the post-economic-liberalization period in India. Likewise, the said chapter reviews current practices in corporate governance among Indian companies. Chapter 4 critically overviews prevailing corporate governance practices in Brazil, where interestingly, one of the major areas of weakness is the board of directors. Many firms have boards too small to be effective, while many have no independent directors at all or a lone token one. Chapter 5 discusses the emerging understanding amongst boards about the integration of strategy, risk, sustainability and performance in corporate governance codes in South Africa. Chapter 6 examines corporate governance pra...

Indice dei contenuti

• Cover
• Title
• 1  Introduction
• 2  Corporate Governance and Corporate Social Responsibilities in China
• 3  Corporate Governance in India
• 4  Corporate Governance in Brazil
• 5  Corporate Governance in South Africa
• 6  Corporate Governance in Russia
• 7  Corporate Governance and Corporate Social Responsibility: An Indian Case Study
• 8  Issues in Social Impact Management and Sustainability
• 9  Conclusions
• Name Index