Measuring the impact of globalization on corporate governance in emerging markets.

Author:Perry, Frederick V.
Position::Report
 
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  1. INTRODUCTION

    The impact and cost of the recent global financial crisis of 2008 + was staggering when compared to previous financial crises. We have yet to see the final outcome of this man-made disaster and will likely feel the ensuing consequences for at least another decade. One of the critical repercussions was loss of public and investor confidence in the soundness and stability of the financial systems of the world's most highly developed countries, such as, U.S., U.K., Germany, France, Switzerland, to mention a few. Of particular concern, is the loss of confidence in the large, too big to fail, global commercial banks. This has for better or worse shaken the bedrock of major financial centers.

    While most academic and practitioner researchers agree that a country's financial sector soundness is a very significant indicator of a countries economic health, there is considerably less agreement and substantial confusion surrounding what constitutes a healthy corporate governance system in the aftermath of the 2008 + financial crisis. Corporate governance, management compensation and bonuses, and risky behavior are all under scrutiny as academics and regulators alike are trying to quantify what is "healthy, safe and good practices" for not only the banking industry but other major industries. The current need to quantify, measure, evaluate, and compare is driven by the desire to spot and deal with "bad and risky" behavior and prevent real damage and cotangent in markets and for investors, and tax payers as such behavior did in the recent crisis.

    These types of corporate governance assessments have taken on a new urgency as vast amounts of capital flows are being redirected to emerging markets, such as, China, India, Brazil, Russia, and Thailand. The capital flows (over $1 trillion) to these emerging markets are due to the rapid economic growth rates that these countries are experiencing and are forecasted to experience over the next 3-5 years compared to the current and projected sluggish growth in the developed countries. Needless to say, that measurement of corporate governance soundness is even more complicated when it comes to emerging markets where regulations, supervision, corporate governance, and accounting practices are even more unclear than in developed economies.

    It should be noted that while measuring and creating indexes for measuring the soundness of corporate governance systems is important, it is perhaps equally important to measure the impact of globalization on corporate governance so that we may better understand the evolving nature of corporate governance in various markets, especially emerging markets.

    Thus, it is the goal of this study to examine the impact of globalization in emerging markets. We use two case studies of China and Egypt (all analysis of Egypt is prior to the people's revolt in February 2011), and we use Germany as a benchmark case. All three countries are major players in their own regional block and we use these countries to represent examples of what is taking place in broad sectors of the worlds' corporate governance regimes. China is the powerhouse of Asia, has the world largest population (1.3 billion people) with a GDP of US $6.499 trillion. It exports annually US $436.1 billion and imports US $397.4 billion (www.cia.gov). Its influence in trade, investments, and impact on commodities (such as, oil) (Lim, 2004), are second only to the United States. Egypt is the most populace country in the Arab world, with a population of 76 million and a GDP of US $295.2 billion. Egypt imports US $14.75 billion per year, and exports US $8.759 billion (www.cia.gov). It is one of the most influential of Arab countries not only in trade and tourism, but also in other industries, such as, being the largest producer of Arab cinema and books in Arabic. Germany, with a population of 82 million and a GDP of US $2.271 trillion is the largest and most influential economy of the 27 member European Union. Germany exports annually US $696.9 billion and imports US $585 billion (www.cia.gov). While the academic literature is robust in assessing globalization in developed countries, it is less vigorous on corporate governance soundness and risk analysis with regard to emerging country corporate governance changes. Moreover, the literature on globalization and its impact on corporate governance risk and soundness, to date, have mostly addressed general western type legal and accounting regimes. This study aspires to make a theoretical and practical contribution to the study of globalization and its impact on emerging market corporate governance. Moreover, identifying weak and risky corporate governance early in these markets is imperative to avoid the trigger factor and cotangent for a global crisis that leads to economic crisis as evidenced by the past financial crises.

  2. CORPORATE GOVERNANCE AND GLOBALIZATION

    Good corporate governance is essential for the development of a competitive private sector that in the long-term is able to attract and retain the capital needed for investment (OECD, 1999). The International Corporate Governance Network, a global membership organization, attempts to spread good corporate governance standards world-wide, and has issued its latest ICGN Corporate Governance Principles, and in those Principles, has stated that:

    The objective of companies is to generate sustainable shareholder value over the long term. Sustainability implies that the company must manage effectively the economic, social and environmental aspects of the business.

    Companies will only succeed in achieving this in the long run if they manage effectively their relationships with stakeholders such as employees, suppliers, customers, local communities and the environment as a whole. (ICGN Global Corporate Governance Principles, 2009)

    The corporate governance systems used throughout the world are generally rooted in either the stockmarket based Anglo-Saxon (outsider system) used in the U.S. and U.K., or the more traditional bank-based (insider system) European and Japanese governance systems (Halpern 2000). The first question to ask is if globalization makes a significant impact on countries corporate governance? Corporate governance is, after all, a domestic phenomenon--subject to domestic law and custom. Corporations are constructs of domestic and local law; they are not international legal institutions. Corporate governance rules and laws are territorial by their nature. Accordingly, it appears on the surface, at least, that international law or processes should not affect such items as the corporate governance of domestic corporations. This is, however, not the case. Changes are occurring around the globe at accelerating rates in these matters of domestic law and custom insofar as the governance of the corporations is concerned. The varying systems of corporate governance do seem to be converging, that is, becoming more rather than less alike (Liang and Useem, 2009); but this does not mean that systems are becoming homogenized. It does mean that certain common key elements are starting to be implemented, in differing ways perhaps, in many countries around the globe ... The major elements are transparency, shareholder equality and protection, especially of minority shareholders, and responsibility to the shareholders. This phenomenon seems to be happening particularly within global corporations who list themselves on the New York or London stock exchanges for access to large pools of financing, and thus must, by default, adhere to "Anglo Saxon" accounting, reporting, and ultimately shareholder styled management and corporate governance. However, it should be noted that systems whose primary goal, if not complete goal, was increasing shareholder wealth-like that of the United States (for example, Mich. 1919 where the court held that a business is organized primarily for the profit of the shareholder and not for the welfare of the public or the welfare of its employees).--are also starting to change, so that they are converging toward the protection of other stakeholders in addition to the shareholders, moving somewhat toward the principles espoused by the OECD (OECD, 1999).

    One or two definitions are in order at this point. First, what is meant by the term "corporate governance"? It means simply the way business is run. Any organization, whether it be a club, a company or a country has a system of rules, regulations, customs, law even, which set forth the way that the organization is run, or the way it is governed. The interaction of the people and such rules in the context of the corporation is what we call corporate governance (Perry and Rehman, 2005). And for our more specific purposes:

    "Corporate governance can be viewed as the mechanism to minimize the loss of value occasioned by the separation of ownership from the management. Through the institution of the joint-stock company or listed company-as it is widely known in the UK--or publicly held corporation-as it is called in the US--investors are separated from management. While this separation provides benefits, such as the specialization of management functions and diversification of risk across the investor-stakeholder base, there are also significant costs (the foregone value) that arise due to this separation. However, effective corporate governance minimizes these costs." (Perry and Rehman, 2005).

    The foregoing represents the view of the lawyer and the economist. Another more social and business oriented view holds that:

    In a nutshell, CG is defined as: "the system by which corporations and institutions are directed, controlled and held to account. It is connected with the social, political and legal environment in which the corporation operates; the institutionalized processes, systems, practices and procedures-the formal and informal-rules that govern the corporation; the manner in which these are applied and followed...

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