MG 912:

COMPARITIVE
CORPORATE
GOVERNANCE
ASSIGNMENT

REINA SHERIF
201560245
 CONVERGENCE IN CORPORATE GOVERNANCE
INTRODUCTION
The aim of this report is to analyze the concept of convergence with respect to governance.
The report has been divided into three sections for better clarity and clear understanding this
concept.
Section 1: Ongoing Debate Convergence V/S Divergence explains the current scenario
where supporters of convergence theory consider the Anglo American model as an ideal
model to which firms can be aligned to and the arguments put forwarded by opponents of
convergence theory.
Section 2: Drivers Of Convergence, explains in detail on how various major forces such as
integration of financial and product markets, diffusion of good codes of convergence and
uniform and internationalized accounting standards drive the process of convergence.
Section 3: Drivers Of Divergence, describes various impediments faced by firms and countries
in the process of convergence. There are various practical concerns like path dependency and
complementarities, difference in legal systems, resistance from political parties, multiple
optima, religious and cultural factors, difference in social norms and property rights regimes.
SECTION 1:-THE ONGOING DEBATE convergence v/s divergence
The concept of convergence with respect to governance can be defined as a process to
implement uniform governance practices in firms across different countries. Convergence can
occur through their systems, rules and regulations, different kinds of structures or different
types of processes.
The most prominent two forms of governance structures are
i) Anglo-American model that is followed in USA and UK. This model is shareholder-
oriented and the ownership is often dispersed.
ii) Concentrated ownership model that is followed in Europe, Japan and Germany. This
model is stakeholder oriented.
Advocates of convergence believe that Anglo-American model is the ideal model, since there
was a growing need to prioritize shareholders interest globally. Different countries across the
globe have taken up their own form of governance structure. Uncontrollable rise in
globalization and integration of financial markets have given firms immense pressure to
compete and in such scenarios, convergence would ensure a uniformity in governance policies
and thereby provide firms with competitive advantage such as attaining equity capital at
reduced costs, opportunities to develop new products at a faster rate and deselect inefficient
investments. Various forces that drive firms towards convergence have been briefed under the
section: drivers of convergence.
However, the supporters of divergence argued that not only Anglo American model has
limitations and flaws but it also depicts imperialistic characteristic of US economy. Besides this,
there are other obstacles for convergence to occur which are briefed under the section 3:
drivers of divergence
Contributions put forwarded by professors Coffee and Gilson throw a different light onto the
debating topic of convergence. They explain three observed levels of convergence across
different institutions. Firstly, functional convergence, where current governance characteristics
of the institution remain unaltered while responding to the changes flexibly. Secondly, formal
convergence, where institutions are subjected to formal changes in its characteristics, to
accommodate the new changes. Lastly, convergence by contract occurs when institutions are
devoid of flexibility to make responses without any change and face restrictions for changes
from political forces.
Some researchers are of the opinion that instead of completely changing or avoiding
convergence, companies can have hybrid systems of governance. In such systems, continuity
and change can coexist and companies have the option to choose governance system of their
choice.
It is to be considered that convergence can vary at firm level and even in industry level. Infosys,
Indias largest software giant, proved that convergence need not be implemented at national
level. They tried to improvise their governance policies at every possible segment and area, and
is now regarded as an organization with highest and best practices of governance. A study on
the governance practices of Infosys, also revealed that different industries within same country
can possess different governance parameters to achieve competitive advantage. It is to be
noted that companies that face global markets at a regular pace have high chances to develop
hybrid systems that incline towards the characteristics of Anglo-American model as they are
confident it would fetch them benefits than companies that operate domestically.

Driving forces and impediments of convergence determine the occurrence of convergence, the
rate at which it will occur and to the degree to which it will occur. Hence, a clear understanding
about them is highly required by firms before they make any decision regarding convergence.
SECTION 2:- DRIVERS OF CONVERGENCE

Besides adopting Anglo American model when exposed to international markets, firms are subjected to
certain types of pressures as a result of which uniformity in practices occur and convergence can be
achieved. A coercive pressure is faced by firms when they need to comply with regulatory requirements
as they try to access foreign markets. A mimetic pressure is developed, especially in firms from under
developed countries where they try to adopt or follow blindly best practices from developed countries.
Following mentioned driving forces can act independently or interact with each other,

INTEGRATION OF FINANCIAL MARKETS

1) Firm listings in multiple stock exchanges

Researches clearly demonstrate that recent firms have exhibited a greater interest in enlisting
their equity shares in foreign exchanges than the domestic ones though they have to bear
additional costs for compliance and regulatory issues, as this portrays them as firms which are
keen in adhering to international standards , such as. USA & UK exchanges. Hence, they benefit
by increasing the valuation and such an action leads to convergence

2) Expansion of foreign portfolio investments

Foreign investors are often interested in diversifying their portfolio by investing in multiple firms
in small stakes, be it in countries like India or China where they can attain higher valuation or
any other country, where they have the advantage of liquidity and ability to reduce risk.
 However, in order to attract and retain such foreign investors, the country should provide them
with high standards of governance and ensure the rights of minority shareholders are protected.
To attain this, they need to adopt best governance practices across the globe and blend it to
their existing ones. Such a measure is essential as it boosts the confidence level of foreign
investors to invest.

3) Cross- Border Mergers & Acquisitions

Often listing in a foreign exchange is an indication that investor is interested in investing in that
respective country. It is assumed that while merger or acquisition occurs, governance practices
followed in that country is adopted by the investing companies and integrating it to their
existing governance principles. This leads to convergence.

PRODUCT MARKET INTEGRATION

An optimal governance system is represented as an efficient system. In the current competitive global
environment, firms are trying out all possibilities to attain competitive advantage. To meet the market
requirements and with the advancement of technology, most firms obtain the most recent and
innovative methodology, which results in firms having similar characteristics in their governance systems
and thereby achieve convergence.

DIFFUSION OF GOOD GOVERNANCE CODES

Good governance codes are considered by majority of firms world-wide as best practices and followed
wisely as it provides legitimacy despite being a non-mandatory requirement. A classic example is UKs
Cadbury Committee report published in 1992. The report created a positive impact such that
development of such similar reports were closely being made by many countries. Countries with weak
shareholder protection rights are subjected to legitimization pressures and they require the utmost
need for diffusion of governance codes. Adopting similar governance codes across different countries
leads to convergence.

HARMONIZATION OF ACCOUNTING RULES.

A hindrance faced by many firms when listed in foreign exchanges is they fail to understand the
accounting principles followed in that respective country and this creates a block in the cash flow. To
address this issue, IASB has developed international standards of accounting emphasizing on having a
uniformity on mandatory disclosure requirements, which results in driving convergence process.
SECTION 3:- DRIVERS OF DIVERGENCE

Despite the above mentioned drivers of convergence, different forms of governance still exist today.
Research shows that changing environmental factors produces different responses in governance and
changes occur. These differences in governance policies hinders the process of convergence. Hence, the
environmental factors that lead to these changes can be termed as drivers of divergence. Most common
driver for divergence are discussed below:-

PATH DEPENDENCY

A governance system of a country highly depends on its initial historic events, associated policies and
responses to these events and path that has been followed. Divergence occur as it is impossible to have
same historic events and path for two countries nor can it be replicated.

COMPLEMENTARITIES

A governance structure that is present in any country currently, is due to a set of complementary
elements. Research evidence shows that improving any of these elements can have an adverse effect on
the efficiency of the structure. Core complementary elements present in Anglo- American governance
structure and different from the Japanese form of governance structure. For example, high dividends in
the case of Anglo American structure yields benefits to shareholders yet in Japanese structure, one of
their core elements is cross-shareholding, there would not be any effect other than dividends being paid
out among firms.

RESISTENACE BY POLITICAL PARTIES

Even if the governance structure is sub optimal, they would continue to persist because of the resistance
exhibited by political parties to changes. These parties resist change as they fear of losing their benefits
of power of control.

DIFFERENT LEGAL SYSTEMS

Investors from countries that follow common law ,like Anglo-Saxon countries, would find it hard to
invest in countries that follow civil law,(continental countries),as they have weaker shareholder rights
protection and the markets found there are less developed. In such scenarios, convergence would be a
tedious task.

MULTIPLE OPTIMA

Every country tries to attain an equivalent governance structure, through a variety of policies and
complementary elements, that can be used in the long run purpose. Upon attaining it, it would resist
change to a new model or adapt other model of governance, for following reasons: - belief from the
studies that demonstrates there is no perfect model, fearing the cost to incur for transaction and
resistance by political parties.

RELIGION

Convergence between governance structures of countries that follow religious law, like Islamic countries
and countries that follow OECD principles would be difficult as the basic principles are very different.
CULTURE

Culture varies from country to country and conduct of business can be smooth of if there is thorough
understanding about them. In case of Anglo Saxon countries, transparency, disclosure and audit are
considered important and valued high whereas in less developed countries, they are at lower side.

DIFFERENT PROPERTY RIGHTS REGIME

There are variations in regime devised for protection of property rights among various countries.
Convergence will be hindered or discouraged or mostly episodic in nature in those countries where
government retain greater control over property rights. Such countries normally have firms that are
family run, or small in nature. They have to invest heavily in political capital and can be only recovered in
the long run. A classic example is country like India. Infosys, an IT giant, failed miserably in attempting to
converge its governance structure.

DIFFERENCE IN SOCIAL NORMS

Other than meeting the legal norms, some firms differ in their social norms. Countries like Japan and
Germany, have social norms as one of their key business objectives whereas in UK and USA, importance
is given only to interest of shareholders.
CONCLUSION

Convergence of good governance practices has plenty of advantages. However, there is no existing
model of governance structure to which firms and countries can adhere to or rely on. In order to attain
competitive advantage, firms need to select right complementary elements from other structures and
integrate it to the current system after having a clear understanding of good corporate governance
practices, thereby ensuring there is no lag in codification.
REFERENCES

Yoshikawa, T., and Rasheed, A. A., Convergence of Corporate Governance: Critical Review and Future
Directions, Corporate Governance: An International Review, 2009, 17(3): 388404

Afsharipour, A., Corporate Governance Convergence: Lessons from the Indian Experience, Northwestern
Journal of International Law & Business, Volume 29, Issue 2 Spring

Sarra, Janis P., Convergence Versus Divergence, Global Corporate Governance at the Crossroads:
Governances Norms, Capital Markets & OECD Principles for Corporate Governance. Ottawa Law Review,
Vol. 33, No. 1, 2001.