Notes taken form Yoshikawa and Rasheed 2009
What is convergence?
Convergence refers to increasing isomorphism in the governance practices of public
corporations from different countries.
Researchers have made a distinction between convergence in form and
convergence in function:
Form - increasing similarity in terms of legal framework and institutions
Function - different countries may have different rules and institutions but may
still be able to perform the same function such as ensuring fair disclosure or
accountability by managers
When existing institutions lack the flexibility to respond without formal change and
political barriers limit the capacity for formal institutional change, an alternative would
be contracts. Hence, in any examination of convergence it is important to be clear
about what kind of convergence we are discussing.
Drivers of convergence
Convergence proponents, who emphasize efficient market considerations, argue that
globalization accelerates competition over “best practices,” and firms that are more
exposed to global markets are compelled to adopt the Anglo American model, as it is
seen as a de facto global standard (Hansmann and Kraakman, 2001).
On the other hand, institutional theory holds that organizational fields tend to become
isomorphic over time as a result of three kinds of pressures – mimetic, normative,
and coercive (DiMaggio and Powell, 1983).
For example, when a firm from one country accesses capital markets of another
country, it has to conform to the regulatory requirements of that market which act as
a coercive force. Similarly, when firms from one country begin to follow what they
perceive to be the best governance practices from another country, it could be
viewed as a mimetic process.
Integration of Financial Markets
The integration of financial markets has been offered as the primary driver of
convergence of governance practices (Nestor and Thompson, 2000; Khanna and
Palepu, 2004)
Financial Market Integration takes many forms:
a. Listing a company form a country to the stock market of other country
b. Increasing foreign portfolio investment in both developed and developing
countries, cross-border mergers
c. Acquisitions
d. Free capital flows around countries
,The US and London stock exchange have seen a lot of new IPO listings recently,
especially during the pandemic. Even if there are significant regulatory and
compliance costs, those companies were not discouraged.
The last 15 years has seen a substantial increase in foreign portfolio investment in
virtually all regions of the world (Useem, 1998).
Personal example: That is more easily illustrated by the pandemic bubble created in
the stock market. High inflation along with the raised costs of living made people to
restructure their spendings. Also during the pandemic, individuals saved a lot of
money by choosing not to go out, not to travel, not to eat out etc. This was reflected
in the stock market because people were afraid to lose their money so they
restructured their spendings and investments, choosing the US stock market no
matter where on earth they were residents.
At the institutional level, it is argued that governments compete to attract firms to
locate their operations in their countries (Witt, 2004). This leads each government to
introduce attractive regulations including those on corporate governance. As global
product market competition intensifies, corporate governance systems at the firm
level also become similar, because firms decide to adopt more efficient elements of
corporate governance systems (Witt, 2004).
Diffusion of Codes of Good Governance and Harmonization of Accounting
Rules
What drives the diffusion of the good corporate governance codes?
Aguilera and Cuervo-Cazzurra (2004) suggests that countries with weak shareholder
protection, high government liberalization, and a strong presence of foreign
institutional investors tend to develop the codes. Their study suggests that both
institutional and market pressures play a role in spreading the good corporate
governance codes.
Good governance codes are not often mandated legal requirements but a set of
norms, adherence to which is voluntary.
Codes can be developed by stock exchanges, government, directors’ associations,
managers’ associations, professional associations, or investors, associations.
Regardless of who issues the code, once they are published, they become an
important source of normative institutional pressure for convergence within a country
, Impediments to convergence
Even when changes occur, they seem to be the direct consequence of endogenous
factors within a country rather than the result of global factors pushing towards
convergence (Hermes, Postma and Zivkov, 2006)
1. Path dependence - the evolutionary trajectory of the governance system of a
country is the result of thousands of individual historical events and policy
responses to them.
For example, banks play a relatively minor role in monitoring corporations in
the US, compared with Japan or Germany, because legislation enacted
almost a century ago specifically restricted the role of banks. Even if we
hypothetically agree with the perspective that bank monitoring reduces
agency costs and encourages a long-term orientation, any legislation
permitting banks to own large blocks of shares is unlikely to make the US
governance system similar to that of Germany or Japan
Directions for future research
1. Hibridizatioin Patterns in Governance Practices
Although, the outsider-monitoring model form the US and UK firms is emerging
as global standard, the local rules form many countries have not been taken
apart. Hence, several authors suggest that continuity and change in institutions
often co-exist and create hybrid systems (Jackson and Moerke, 2005; Ahmadjian
and Okumura, 2006)
Pressures for corporate governance change can lead to hybrid practices that
combine the local practices with new models that are often imported from other
institutional contexts
Firms and states do not simply discard the old models and adopt new practices, especially those
imported from different institutional contexts (Deeg and Jackson, 2007)
Notes form class
Convergence: countries with a stakeholders-oriented purpose are turning to a
shareholder-oriented model of corporate governance.
• 1990s: policymakers in countries with a stakeholder system implement
shareholder-oriented reforms.
• On convergence to a shareholder-oriented system of corporate governance,
see Hansmann and Krakman (2001).
Divergence
