Corporate Governance: International Perspective

Introduction

Corporate responsibility always goes with the practice of corporate governance. The practice of the latter is a representation of the former. Corporate governance normally serves as the core basis in the achievement of a “stable and productive business environment” (Economic Perspective, 2006 p2).

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Knowing what corporate governance and responsibility is and its impact on the investors in a particular country had become one of the major concerns of globally competitive countries, as well as those who are only on their way to become one. Getting acquainted with the principles governing corporate governance will further help the economic progress of the country and create a strong and stable economic status. Good corporate governance attracts more investors upon which contribute to an increase in power in the global context.

The Rise of Corporate Governance

After the famous Cadbury Report released by the Committee on the Financial Aspects of Corporate Governance chaired by Sir Adrian Cadbury, corporate governance had gained the awareness of the public, most particularly the investors” (Economic Perspective, 2006, p3).

The report defines corporate governance “a system of checks and balances between the board, management and investors to produce an efficiently functioning corporation, ideally geared to produce long-term value,” (Garrett, 2004, p4) and others would refer it to the “rules that guide the behaviour of corporations, shareholders, and managers, as well as to government actions to promote and enforce those rules” (Economic Perspective, 2006, p3).

Principles

There are several fundamental principles that involve the achievement of responsible corporate governance. The first principle establishes the roles of management and the board, with a balance of skills, experience and independence on the board appropriate to the nature and extent of company operations stated under the second principle (ASX Corporate Governance Council, 2006). Integrity is as well significant in attaining strong corporate governance thus, its importance among those who can influence a company’s strategy and financial performance, together with responsible and ethical decision-making encompasses the third principle (ASX Corporate Governance Council, 2006, p6).

The fourth principle tries to meet the information needed of a modern investment community that is paramount in terms of accountability and attracting capital, as well as presenting a company’s financial and non-financial position requires processes that safeguard, both internally and externally, the integrity of company reporting. The provision of a timely and balanced picture of all material matters makes up the fifth principle. The rights of company owners, that is shareholders, need to be clearly recognised and upheld is contained within the sixth principle (ASX Corporate Governance Council, 2006, p6).

The elements of uncertainty that carries a risk that can be managed through effective oversight and internal control holds the seventh principle, and the maintenance of the pace with the modern risks of business and other aspects of governance requires formal mechanisms that encourage enhanced board and management effectiveness is on ASX’s eighth principle (ASX Corporate Governance Council, 2006, p7).

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ASX (2006, p7), furthermore, has added the principles concerning the rewards needed to attract the skills required to achieve the performance expected by shareholders that is contained in its ninth principle. Finally, the tenth principle talks about the impact of company actions and decisions that is increasingly diverse and good governance recognises the legitimate interests of all stakeholders (ASX Corporate Governance Council, 2006, p7).

Significance

Corporate governance deals with these relationships and above all addresses the relationship between the owners of a company and those who manage the company’s operations. The owners are as well the shareholders who are the principals and those who manage the companies are the executives hired by the owners to run the company as agents of the principals (Millstein, 2005, para 11).

Corporate Governance: Global Perspective

Countries around the globe formulate their own individual strategies regarding corporate governance. Meeting up with the demands of the different corporations in the country has become the foremost goal of the countries concerned with economic prosperity and its sustainable development. In relation to the desired corporate governance, governments have become more aware as to how they would help protect the interests of both the domestic and international investors such that they would remain stable for the benefit of the people and the country’s economic progress as well.

Highly developed countries continuously struggle upon coming up with the perfect corporate governance. Good examples of this are those countries with a legal system based on a British common law, which believe that the interests of shareholders are should be the dominant factor in decision making process of the corporate. On the other hand, for the developing countries that have conventionally cultivated the idea of partnering the management, employees and stakeholders are now seeing the investor protection as an important signal to potential capital providers. Furthermore, they now hold on to the concept that through the demonstration of adopting corporate governance principles will promote investor trust thus increasing capital, which will in turn lead to investment and economic growth. Moreover, modifying these principles is necessary to match the needs of its local or domestic investors. However, there are still some important aspects which needs to be taken cared of and could be found necessary and significant in order to adapt to the demands of the stakeholders as well as the community itself (Millstein, 2005, para 12).

On the other hand, countries with a more sophisticated financial market, their corporate governance rules and structures are contained in laws protecting property rights and shareholder rights through legislation, accompanying regulations, judicial decisions, and stock exchange listing rules. This situation has been the most important strategy that works for the government that is parallel to the need of their markets. It has been fundamental for these countries to utilize such strategies to meet the needs of their investors (Millstein, 2005, para 15).

Similarities of Corporate Governance from Two powerful Countries – US and Australia: A Case Analysis

Since United States and Australia are countries which are already considered to be globally competitive that has attained its almost perfect status in the world market, developing countries are basically taking into account every step that they make for which they might soon adapt to attain the same position in the global context. Therefore, studying both countries’ corporate governance is necessary in order for other developing countries to learn from their experiences.

Global trends in the corporate governance made the countries more or less similar when it comes to their responsibilities concerning the issue. Not only in the implementations did these countries have become similar, but even with the different issues involving controversies and failures connected to corporate governance as well.

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These breakdowns have further aroused the debate about corporate governance, which resulted to more action that geared upon regulatory reforms. One of the most significant cases in corporate governance failures were those of the United States’ Enron, Worldcom and Tyco that later initiated the major debate and legislation in the country. Australia has its own significant issue that of the HIH, an insurance company that collapsed in 2001 with debts of about $5.3billion (Saville, 2003, para 8). There were also other businesses that had collapse such as the Ansett Airlines and One Tel in Australia (OECD, 2003, para 3).

Australia’s system of corporate governance is usually said to be comparable to other highly developed countries like United Kingdom and the United States in terms of ownership and control (Dignam & Galanis, 2005, para 6). Corporate governance in Australia is referred to as an “outsider” systems because is practices the concept of dispersed shareholdings where shareholders and companies interact on an arm’s-length basis. More so, Australia’s corporate governance have it shareholders dispersed and are indirectly involved in the control of companies (Dignam & Galanis, 2005, para 7).

Moreover, this idea of the Australian corporate governance is somehow proven to be true since many of the key institutions present in countries with outsider systems are as well present in Australia. A securities market, a securities regulator, a takeovers panel, a disclosure regime and outsider corporate governance codes evolve around the Australian corporate governance system (Dignam & Galanis, 2005, para 12).

Australian Stock Exchange (ASX) had become an essential matrix for the country regarding legislation, accounting standards which have the force of law, ASX Listing Rules, and voluntary self regulatory codes of practice (Corporate Governance Framework, 2006, para 9).

Concerning the roles or duties of the director, the Australia’s corporate governance involve the independent directors and independent chairs to meet 8/10 times a year which is very close to what the governance activists would like to see as the average (Wallis, 2000, p7).

However, the United States’ corporate governance consider its own corporate law as a tiny part in a huge and multifaceted U.S. corporate governance system. This system may involve matching institutions, incentive arrangements, limitations, and policies that work together benefiting the whole system (Paredes, 2004, p2).

The complex governance system of the United States requires the country to put the importance on shareholder performance while catching up with the managerial action in a strong legal and regulatory framework designed to ensure legitimacy and prevent conspiracy. The emphasis of the corporate governance in the United States is towards the protection of its shareholder rights and maximization of shareholder return, and meeting the metrics imposed by an active, liquid, and deep capital market (Detomasi, 2002, p6).

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Around 80 per cent of US companies combine the (chairman and CEO) role, while that of the European countries including Australia, its advisers and others with relationships to the company are valued as directors (Wallis, 2000, p8).

The U.S. corporate governance system also relies on directors and officers “to do the right thing” by voluntarily taking steps to maximize firm value even when nobody is watching and there is little if any risk of market or legal sanction. Norms have received a great deal of recent attention as an important extralegal governance device (Paredes, 2004, p3).

Consequently, relying too much on the directors may develop a negative effect on the system’s governance. Given such very strong authority, officers and directors are challenged to control agency costs. Therefore, whenever the interests of directors and officers conflict with the best interests of the corporation and its shareholders, the concern is that management will tend to act in its own self interest. For example, managers might decide to avoid, pay themselves excessive compensation packages, have fancy corporate jets and other perks, or build an empire by acquiring companies, all to the detriment of the company and shareholder value (Paredes, 2004, p5).

The United States corporate law, though a state law, the mandatory disclosure regime of the federal securities laws makes possible the market-based corporate governance system of the United States. Mandatory disclosure, backed by stringent antifraud provisions, plays a critical role in U.S. corporate governance by ensuring that investors, with the assistance of the supporting institutions described above, have adequate information to exercise their rights to vote, sell, and sue. The ability to exercise these rights allows investors to protect their interests without the need for more substantive regulation of internal corporate affairs at either the state or federal level (Paredes, 2004, p5).

Moreover, the US corporate governance, public enforcement is limited to a few cases of serious fraud. As a result, there is no civil penalty regime and very little disqualification of directors compared with Australia, and that is a problem. In Australia, enforcement of civil penalties and disqualification of directors are increasing significantly (Farrar, 2005, p4).

The creation of Australia’s Australian Stock Exchange and the United States’ Sarbanes-Oxley Act of 2002 reforms both countries’ “failure” in its corporate governance. This reform, however does not give a negative impression against the government and its governance towards the investors, instead it further attracts more investors such that it shows the responsible actions of both counties addressing the problems and its avoidance in the future.

Basically sharing almost the same successes and failures in its corporate governance, US and Australia have fought back and stood still amidst the different issues and criticisms against proper and good corporate governance.

Ethical concerns with regards to the implementation of the various interests of the investors within the two countries are addressed in the reforms such that an equal penalty is specified for those who violate the principles.

To attract the right men and women, at the right age and with the right experience, there is a need to lift remuneration levels, notwithstanding all the hassles this will cause at annual meetings, in the media and from politicians. Part of this may be paid for by moving to somewhat smaller boards, but not all. (Wallis, 2000, p8)

Responsible corporate governance should be prepared to move towards more equity-based remuneration, but recognise that many present and potential non-executive directors will need to be able to access sufficient levels of cash remuneration for their personal needs. It will be interesting to know that in the US is an under way a significant reversal of previous governance wisdom on this subject. Stock options for directors are now accepted on the basis that they help to align board and shareholder interests (Wallis, 2000, p8).

Conclusion

The proper governance of companies will become as crucial to the world economy as the proper governing of countries… strong corporate governance produces good social progress. The two go together.” James Wolfensohn, President of the World Bank (qtd in Detomasi, 2002, p2)

Economic prosperity is a product of a strong collaboration between the investors and the government. Both local and foreign investors need an assurance of their security and protection of interests from the government. A call for a responsible corporate governance in return yields a rewarding economic stability that eventually contributes to the country’s progress.

Corporate governance and responsibility of a particular country are measured up by international investors in order to protect their interests, especially in the global market. The rules concerning the implementation of these decrees should be in their favour.

Since the fall down of Enron and Worldcom, and the implementation of Sarbanes-Oxley Act of 2002 in the United States, domestic and foreign companies have become more prudent in analyzing corporate governance and responsibility. Because of these incidents in the past, corporate governance is recently facing a stage wherein it has to meet up with global demands that recognizes the fact that every country has a need to attract and protect its investors. Once these conditions of global convergence are met, global capital will generally flow at favourable rates to where it is best protected, but will not flow at all or will flow at higher-risk rates where protections are uncertain or nonexistent (Millstein, 2005, para13).

Globalization has determined the trend in economic prosperity as with the appropriate and relative corporate responsibility exhibited by enviable corporate governance.

References

“ASX Corporate Governance Council.” 2006. Web.

“Corporate Governance Framework.” 2006. Web.

Detomasi, D. 2002. “International institutions and the case for corporate governance: toward a distributive governance framework?” Global Governance.

Dignam, A. & Galanis, M. 2005. “Australia Inside-Out: The Corporate Governance System of the Australian Listed Market.” Web.

“Economic Perspectives.” 2006. Kimberly Economic Perspective. Web.

Farrar, J. 2005. “Toothless tiger: all roar and no bite: when it comes to policing corporate governance, New Zealand’s regime lacks teeth. John Farrar compares local and overseas systems and finds considerable room for improvement at home. New Zealand Management.

Garrett, A. 2004. “Themes and variations: the convergence of corporate governance practices in major world markets.” Denver Journal of International Law and Policy.

“Howard’s Warning To Business On Corporate Governance.” 2002. Web.

Millstein, I. 2005. “Laying the Groundwork for Economic growth.” Electronic Journal of the U.S. Department of State. US Mission in Hanoi Information Resource Center (To request the full text of items desired, please email us at [email protected])

OECD, 2003 “Survey of Corporate Governance Development in OECD Countries.” National Bureau of Economic Research. Paredes, T. 2004. “A systems approach to corporate governance reform: why importing U.S. corporate law isn’t the answer.” William and Mary Law Review.

Saville, M. 2003. “HIH : The Inside Story Of Australia’s Biggest Corporate Collapse.” Web.

Trafara, W & Strahota, R. “Fostering an International Regulatory Consensus.” 2006. Web.

Wallis, S. 2000. “Corporate Governance-Conformance or Performance.(Australia).” Journal of Banking and Financial Services.

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