1. Governing Globally: Convergence, Differentiation, or Bridging
By: Marc J. Epstein
Rice University
© Marc J. Epstein - Corporate Governance - Nice

2. Corporate Governance: Controversy
Some have suggested that countries will (and should) move toward convergence of global governance practices
Some disagree -
- often in law (form)
- and in practice and implementation (function)

3. Q1) Should (or will) corporations move toward - convergence
Two Questions:
Q1) Should (or will) corporations move toward
- convergence
- differentiation, or
- bridging based on common principles of good governance?
A1) Not convergence, but understanding differences. Using different lenses in evaluating corporate and board performance
© Marc J. Epstein - Corporate Governance - Nice

4. Q2) Which system is best?
A2) Not much research, classification, or analysis to answer this question. This presentation tries to frame that discussion.
This has major implications for corporate practice and creates critical need for more academic research.
© Marc J. Epstein - Corporate Governance - Nice

5. Background
Corporate governance issues have become more visible and critical – globally:
- scholarly research
- regulation to improve performance
- corporate practice .

6. Many examples of failures: - Satyam - Parmalat - Enron
Some failures caused by fraud
Some failures caused by poor oversight
Significant differences in global views (academic and managerial) of problems, causes, results, and solutions.

7. The Model
In 2002, developed a set of principles and a model (Corporate Board Performance Model) including inputs, processes, outputs, and outcomes necessary for superior board and corporate performance.

8. The principles do apply:
globally,
For profits / non profits,
Large and small, and
Publicly / privately controlled
But, how the principles are applied globally varies significantly. And, the evaluation of success must differ significantly.

9. The model addresses management control and performance measurement.
What are the actions that managers, directors, investors, and other stakeholders can take to ensure superior board performance (and corporate performance)?
What are the appropriate measures of success – both internally and externally?
© Marc J. Epstein - Corporate Governance - Nice

10. Board Roles and Responsibilities
Financial issues
Accountability
Corporate behavior
Governance issues
Performance evaluation
Board roles and responsibilities
Senior level staffing and evaluation
Selection and compensation
Director’s nomination and training
Strategy formulation
Strategic oversight
Strategy implementation
Strategy monitoring
© Marc J. Epstein - Corporate Governance - Nice

11. Corporate Board Performance Model
• Independence
• Diligence
• Competence
• Ethics
INPUTS
Board Composition
• Board and committee structure
• Productive meetings
• Succession planning system
• Financial reporting & communication/risk mgmt.
• Strategic information system/information availability
• Performance evaluation / compensation systems
Board Systems and Structure
PROCESSES
Board Performance
Feedback
• Superior strategic guidance and oversight
• Accountable organization
• High quality senior executives
OUTPUTS
Corporate Performance
▪ Long term financial success
OUTCOMES
© Marc J. Epstein - Corporate Governance - Nice

12. Global Applicability of the Model
The model and its elements are surprisingly applicable globally
But, its implementation will differ globally
This will significantly impact:
the inputs and processes needed to achieve the desired outcomes, and
the evaluation of success of both board and corporate performance
since country differences are substantial.

13. Current Research
So - examined the extensive prior literature on corporate governance throughout the world
Paucity of cross country analyses
Developed a classification of three primary global corporate governance systems and key differences in practice
Highlights primary similarities and differences
© Marc J. Epstein - Corporate Governance - Nice

14. Based heavily on historical and cultural factors – and impact on management control and performance measurement
Gives context to question of “which system is best?”
Examines differentiation vs. convergence vs. bridging
Provides significant foundation and important questions for future research

15. Governing Globally
Three Systems of Corporate Governance (articulated by Choi et al (1999) and others):
- Anglo American
- Communitarian
- Emerging Markets

16. General Characteristics of Global Corporate Governance Systems
ANGLO-AMERICAN
COMMUNITARIAN
EMERGING MARKETS
EXAMPLES OF COUNRIES
United States, United Kingdom, Australia, Canada, South Africa
Japan, Germany, Belgium, Scandinavia
China, Eastern Europe, Brazil, Mexico, Russia
GENERAL CHARACTERISTICS
Shareholder-primacy
Financing by capital markets prevails
Financial markets influence corporate governance practices
Unitary board structure
Primarily composed of non-executive directors (and independent directors)
Stakeholder-centric
Banks and suppliers own significant equity in a company
Legislation mandates governance standards
Two-tier board structure (supervisory  & management )
Labor, founding family, and bank are common members - interlocking common
State participation in corporate ownership
Government regulates equity markets
Board structure varies  
Large corporate shareholders, such as the state, families, or conglomerates dominate

17. Determinants of Corporate Governance Performance
External - Markets - Legal Systems - Ownership and Control Structures
Internal - Board Composition - Board Systems - Board Structure - Executive Compensation

18. External Determinants of Corporate Governance Performance
CORP. GOVERNANCE MECHANISM
ANGLO-AMERICAN
COMMUNITARIAN
EMERGING MARKETS
MARKETS
Financial Markets
Strong and deep
Weak and thin
Dynamic and volatile
Investment purpose
Short-term return
Long-term return
Policy and Political goals
Methods of finance
Financial markets
Bank credit and retained earnings
Private and state-owned banks
LEGAL SYSTEMS
Legal history
Common law system
Civil law system
Combined systems that are still rapidly evolving
Transactional methods
Contracts
Relationship-based transactions
Relationship-based transactions
OWNERSHIP & CONTROL STRUCTURES
Ownership structure
Diverse individual and institutional ownership
Concentrated family and corporate ownership
Concentrated family, corporate, and gov’t ownership
Minority shareholder protections
Strong
Weak
Non-existent
Dominant control mechanisms
Voting and board representation
Cross-holding, pyramidal groups, lending relationships
Internal and external mechanisms
© Marc J. Epstein - Corporate Governance - Nice

19. Internal Determinants of Corporate Governance Performance
CORP. GOVERNANCE MECHANISM
ANGLO-AMERICAN
COMMUNITARIAN
EMERGING MARKETS
BOARD COMPOSITION, SYSTEMS, & STRUCTURE
Board composition
Basic requirements for independent directors
Strong requirements for both inside and independent directors
Nominal requirements for independent directors
Board evaluation
No requirements for board evaluation
Strong requirements for board evaluation
Nominal requirements for board evaluation
Board structure
Single-tier
Two tier
Board accountability
Shareholders
Stakeholders (including entire value chain and employees)
Stakeholders and
government
Executive Compensation
Large performance pay
Less performance
pay
Little performance
© Marc J. Epstein - Corporate Governance - Nice

20. So, which system is best?
Contingent on objectives, systems, countries
Need to evaluate accordingly
Principles and performance measures need more clarity
System differences need more clarity
More research is needed

21. Future Research
These three corporate governance systems are based on significantly different historical, legal, and cultural contexts
To understand the applicability of corporate governance research in a global context, a clearer understanding of the similarities and differences of the management control mechanisms and measures of board and corporate success is necessary
© Marc J. Epstein - Corporate Governance - Nice

22. This leads to unanswered research questions such as:
This is required for both the application in practice and the foundation for governance research.
This leads to unanswered research questions such as:
© Marc J. Epstein - Corporate Governance - Nice

23. Which system (and/or mechanisms) leads to higher levels of performance?
Is higher level of performance of systems or mechanisms contingent on certain elements or conditions?
Recognizing some differences in objectives, how should success (of both processes and outcomes) be measured and for whom?

24. Summary
Corporations, capital markets and corporate governance are becoming more global.
This is likely to be more about bridging theory and practice rather than either differentiation or convergence.
The global applicability of the model has been striking.
But, it is how to work with multiple systems where corporations and stakeholders have different objectives in different countries.
© Marc J. Epstein - Corporate Governance - Nice

25. In research there is a need to evaluate governance based on the differentiation and accommodation of the various systems in the research design.
Which is better? When? For whom? For what purpose? What are benefits and limitations of each?
There is a significant need for further research on the implementation of the model, and the relevant management control and performance measurement mechanisms.