Evolving standards
While companies lack control over global macroeconomic forces and the fallout from the Asian and Russian markets, they can take steps to attract global investment in the next upswing. They might, for example, adopt global corporate governance 'best practices'.
In the past, in many countries, capital expansion traditionally relied on internal corporate retained earnings, securing bank loans from within a close-knit banking community, or raising long-term equity through corporate cross-shareholdings. Today, if corporations want to expand globally, they must seek capital in a global market. Here, they encounter transnational investors evaluating companies according to an evolving set of global governance standards. These investors are not uniform, but certain minimum standards have emerged, shaped considerably by the US experience in corporate governance.
This is not to say the US system is best. It has had its share of contention and needless acrimony. Moreover, most investors acknowledge that there is much to learn from the governance systems in countries like Japan, France and Germany. Widely dispersed stock ownership in the US has generally not permitted some of the desirable close 'relational investing' aspects of other systems, which also appear to incorporate a broader role of the corporation in society.
In the past, investors have not actively sought companies with specific governance policies. In the perilous and volatile global markets of today, however, many want more explicit indicators of good performance, including an ability to adapt strategy to changing economic circumstances. This often means having a good governance structure.
Installing appropriate corporate governance procedures is like seeking a stamp of approval. It signals that a company meets a minimum threshold level of confidence and reliability in three major areas.
i. Assurances of accountability
Providing accountability to investors requires that companies establish adequate auditing systems. They must also provide external and independent reviews of these systems so investors understand the financial basis under which the company operates.
An important aspect of accountability is that investors not be disenfranchised by decisions affecting their investment being unilaterally made by boards and management. As major blocks of shareholdings are unwound in favor of broader equity participation, there must be improvements for the role of minority shareholders.
ii. Professional processes
Most investors want assurances that companies are run with the highest degree of professionalism. For international investors, a degree of board independence will go a long way toward providing this assurance. It will also involve attracting more non-executive directors with broader perspectives.
Adding global board members may provide useful input. Reducing the number and increasing the intensity of board meetings may overcome some of the logistical problems associated with such globalization. It is desirable to have a general consensus-building approach to board operations, evaluations and top executive succession and to communicate these approaches to investors seeking assurances that power is not lodged with one person. Boards should develop processes for evaluating the strategic direction of the company - and measuring it - and then communicate these to investors.
iii. Providing transparency
In those countries with higher ownership concentration, close relationships typically developed between companies and a core group of investors. Now, the issue is how to broaden disclosure to the market as a whole.
If carefully structured, discussions of strategy can be conducted between interested 'investor-shareholders' and boards of directors for the mutual long-term benefit of both parties. However, certain caveats apply. First, care must be taken not to trigger illegal trading based on selective disclosure. Second, companies must continue to balance the benefits of disclosing information useful for the 'market' against the risk of prompting lawsuits or helping competitors.
Outside the US, there is significant pressure to bring disclosure of information up to US standards. First, regulators and exchanges are pushing companies to increase disclosure and transparency. Second, market forces are compelling many companies in Europe and elsewhere to seek capital from global equity markets, which leads to an opening up of traditionally close relationships between companies and institutions.
At the same time, more in-depth communications are being encouraged in the US, as a result of pressures from institutional activists and initiatives like the safe harbor legislation.
The ultimate result of these trends will probably be a move to the middle ground, with US companies more involved in strategic discussions with their major investors and non-US companies more transparent about their discussions with their major investors.
Overall, global governance trends are being shaped less by country-specific legal systems and culture, and more by the type of investor with which a company deals.
Dr Carolyn Kay Brancato is director of the Conference Board's Global Corporate Governance Center