Corporate Governance For Managers: Shareholder Orientation For Global Application

Shareholder Orientation for Global Application

Discuss about the Corporate Governance for Managers.

The Anglo-American model of corporate governance is shareholder oriented. In this model, there is a bias towards the shareholders of the company over the other stakeholders. Though, there is a justification for this bias, as in most cases such other stakeholders have recourses to protect their interests, for instance through contractual agreements, but in cases of shareholders, they remain unprotected as the activities and management decisions are unpredicted (Emerging Markets ESG, 2005).

This model has been mostly adopted by the corporate governance systems in the US and the UK, and countries of Asia and Europe have mostly been inclined towards the stakeholder-oriented model (Singh, 2016). But with time, a trend of global convergence has emerged. In the following parts, the shareholder orientation of the Anglo-American model of corporate governance, for global application has been assessed. Further, some recommendations are also provided for the OECD regarding the best policies which can be adopted for the promotion of global convergence of the corporate governance practices.

In the present world of globalization, there is diversity in the political, legal, social and cultural systems across the nations. And it is a known fact that the countries are interdependent on each other. This is the reason why the Anglo-American model of corporate governance is gaining popularity (Singh, 2016). This model brings unity to the political, legal, social and cultural system of the world and provides a solution to the disparity of systems.

In the era of the mid 90’s, the discussion began on the matter that the corporate governance code were moving towards the adoption of this model, due to its peculiar characteristics of the shareholder value norms, the one tier boards, and the low ownership concentration (Singh, 2016). Even with the presence of stark level of differences in the corporate governance codes across the globe, the convergence was emerging, and the reasons given for this were globalization, advent of significant foreign investors, and the liberalization of the markets.

The mechanism, as well as, the framework of the corporation governance is varied from country to country, and even from company to company (Singh, 2016). The objectives of the company, along with the political, social, legal, and economic situation of the country influence the mechanisms of governance of such companies.

Due to the shareholder orientation of the Anglo-American model, more and more countries are adopting it. One of the reasons for the adoption of this method by different countries is because this method helps in solving some of the persisting problems. This model helps in monitoring by the market for regulation, as well as, for corporate control. Moreover, it also forces the managers to follow the interests of the shareholders. And since the civil laws of such nations are reliant upon the interests of the employees, creditors and shareholders, this model helps in a compliance of such norms (Palmer, 2011).

Conclusion

Moreover, scholars believe that this model not only benefits the countries, but the companies as well. Due to the increase in globalization, there is diversity in the social, legal, political and cultural systems across the glove. This model provides uniformity in these systems and helps in increasing the competing ability of the companies across the globe. And so, a convergence in the global market would result in the increased interdependence of the financial markets across the globe (Singh, 2016). The proponents of convergence also believe that the Anglo-American model is the most efficient and preferred one, due to its orientation towards the shareholders.

But there are people who oppose this model, as it leaves out the other stakeholders (Lee, 2009). And due to this, this model is still not adopted all over the world. Some opponents argue that such a convergence is not favorable due to the dependency it creates, of the nations over each other. The other point highlighted by the opponents of this model is the successful example of Germany and Japan, who have adopted corporate governance systems which are not shareholder-oriented (Clarke, 2016).

Also, there is the example of the unsuccessful implementation of this model in India, where the model was converged on a formal level, but was never effectively implemented. So, the uniformity was never achieved in India (Afsharipour, 2009). Hence, the convergence can be limited and the transmission from one system to another, which is a highly complex one, and which requires institutional, political and social changes, can be difficult; and this is another limitation of the convergence of the Anglo-American model.

It is crucial to note here that the failure of this model in India was due to the failure of implementation, and not of the model itself. Also, the German, as well as, Japanese governance systems are facing pressure to deliver the shareholder value, especially related to the overseas investment institutions, and are facing demands for an increase in transparency, as well as, disclosures from both the investors, and regulators (Clarke, 2016). This issue is not a problem in the Anglo-American model and hence, even after its criticism, is the best model for convergence.

Conclusion

From the above analysis, it is quite clear that the shareholder orientation of the Anglo American model has made it famous across the globe, and more and more countries are looking at adoption of this model in their governance systems. Even the criticism and opposing points provided by its challengers prove meek. This model helps in uniting the diversity of the globally present systems and benefits the countries and the corporations, by being shareholder oriented.

Recommendations

It is recommended to the OCED that in order to promote, as well as, to advance the global convergence of the corporate governance practices, it should:

• Develop such valuation standards which are of high quality, and are internationally accepted. Such standards should be developed by an independent standard-setting board.
• Conducting peer reviews to promote the convergence in the competitive regimes.
• The adoption, as well as, the implementation of supporting activities.
• An active engagement of the member professional bodies, which are responsible for valuation, so as to promote the ethical standards, along with consistent competency.
• A member bodies’ compliance program (International Federation of Accountants, 2012).

Apart from these, OCED should also work on improving the international competition ecosystem, so that the international trade agenda can be reinforced, and uniformity could be established. This can be done by raising the multi-dimensional awareness, by enhancing the coordination of the competition policy and its collaboration at the global level, and by working towards a regional or bilateral dispute resolution, and appeal mechanism. Lastly, OCED should harness its technical capabilities, along with its networking abilities, so as to develop and strengthen these recommendations, as well as, the best practices in this area (International Centre for Trade and Sustainable Development, 2016).

Venture capital is one of the ways, in which a new business or a business looking for growth attains funding. Such funds come from the venture capital firms, who are specialists in building the high risk financial portfolios. SMEs or the small and medium sized enterprises are such businesses, where the number of employees is less than a certain limit. As is in the case of any other company, to grow, an SME needs funds. And investments, especially in form of equity capital, are the best way to attain such funds.

In the emerging markets, a marked increase has been seen in the number of companies, which are using the public equity markets for the very first time, by using the IPO or the Initial Public Offering. These growth companies have the capability to break away from the stagnant state of being a small or medium-sized enterprise. Nearly half of the equity capital, which has been raised across the world, by using the IPOs, since the 2008, has come from the emerging markets (OECD, 2015).

Though, attaining such investments is not an easy task. The investors have to be sure about the company they invest in and this is where corporate governance plays a crucial role (OECD, 2015). In the following parts, the transition of the corporate governance practices of a SME to a company, which is ready for the IPO, has been discussed. Also, some recommendations have been made for the management committee of the venture capital fund, regarding the best corporate governance practices which should be introduced in all the entrepreneurial growth SME companies, where the venture capital fund is willing to invest.

Part 2

The large public companies are usually associated with the issues related to corporate governance. This is because the stakeholders’ interests are widespread in such companies, and they have different expectation, as well as objectives which have to be considered by the companies’ board of directors. But in the case of SMEs, the corporate governance practices are minimal or non-existent (Dzigba, 2015). This is mostly due to the lack of separation in the ownership and control of the SMEs, which is present in the case of large companies.

But when it comes to a growing SME, which is in need of funds, and is interested in an IPO, it has to attract investments. Such investments are mostly brought by the venture capital funds. And an investor would invest in the company only if it follows a proper governance practice (OECD, 2015). And so the corporate governance issues for such an SME changes from that of a family business based SME. Such an SME would adopt the best practices of the corporate governance, especially the ones which are adopted by the larger public companies, during their phase of growth.

The best governance practices, which can be utilized by such an SME, involve an adoption of the OCED issued Principles of Corporate Governance (OECD, 2015). Some of the other governance practices, which could help an SME in attracting more investors, have been summarized in the table below:

Attributes of Governance	Best Practices examples
Transparency and Disclosure	Ø  The information must be prepared, as well as, disclosed as per the high quality standards of financial and non financial disclosures, and accounting. Ø  The external auditors have to be accountable to the shareholders. They also owe a duty to exercise duel care to the company, while conducting the audit. Ø  The annual audit should be conducted by qualified, independent, as well as, competent auditor, as per the international standards on auditing (IFC Corporate Governance, 2016). Ø  An equal, cost efficient and timely access to the relevant information should be provided by the channels responsible for disseminating information. Ø  Ensuring high standards of governance and transparency in the listing process, by regularly monitoring and enforcement. Ø  Communication of the governance strategies in a clear and transparent manner to the potential investors, and regulators, both before and after the IPO. Ø  The risk management policy of the company should be disclosed to satisfy the investors regarding the clarity of the company in dealing with any risk (Hay Group Limited, 2015).
Shareholder Rights	Ø  Charter, by-laws, as well as governance codes of the company should provide a clear protection to the minority shareholders. Ø  Such code of conduct of the company should also set out clearly the process to report or deal with a non compliance, along with policies which attract shareholders attention, for instance the whistleblower policy (McInnes Cooper, 2016). Ø  Shared agenda, along with proper notice of the shareholders’ meeting should be provided. Ø  There should be a clarity regarding the rights of different classes of shares, for instance, the clarity regarding the class having the voting rights or economic rights. Ø  The ability of participating, as well as, voting at shareholders’ meeting in a meaningful manner. Ø  An equitable treatment should be given in the changes of control, for instance, the tag-along rights. Ø  A fair treatment is necessary for disclosure of information, for instance, the conflict of interest, material shareholder agreements (IFC Corporate Governance, 2016).
Board of Directors	Ø  The board should be composed of a proper mix of professional skills. For instance, one director can be an expert in marketing strategies, and two of the directors can have expertise in the international financial markets or expertise in audit committee requirements (Sandler and Hall, 2014). Ø  The independence component of the board has to be strong. Ø  The accountability of the board, along with the senior management as to be fixed (Yu and Rudge, 2014). Ø  The roles of CEO and the chairman should be separate. Ø  Peer review of the directors, along with periodic evaluation. Ø  Meetings should be held regularly, and agenda of such meetings should be properly circulated. Ø  Proper committees of board should be established to manage the key areas. For instance the audit committee, the nomination committee, or the remuneration committee. Ø  The board has the responsibility for risk, and so the nature and extent of any significant risk sound be dealt by formulating a sound internal control system and risk management policy (London Stock Exchange, 2012). Ø  The independence of such committees of the board also has to be ensured. Ø  Directors should be constantly educated and the new directors should also be educated, regarding the company. Ø  Having transparent, as well as, properly articulated succession plans for the major board positions. Ø  The role, responsibilities of all the board members, along with the committee members has to be chalked out in clear terms (EY, 2016).

Conclusion

As highlighted above, an SME does not generally follow the corporate governance norms when they are in their initial stages. But, when such an SME has to attract investors for IPO, it has to make the transition from nearly no corporate governance practices, to the adoption of best corporate governance practices. This is because an organization which complies with best practices of governance, builds a positive image in the minds of the potential investors, which includes a venture capital fund.

On the basis of above conclusion, it is recommended to the venture fund that it should introduce the tabulated practices in all of its growing SME companies, in which it is looking to invest. This would ensure that the company works in a transparent and accountable manner, and the investment would reap benefits.

References 

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