Convergence of Corporate Governance: Critical Review and Future Directions

• Date: 01 May 2009
• Author: Toru Yoshikawa,Abdul A. Rasheed
• DOI: http://doi.org/10.1111/j.1467-8683.2009.00745.x
• Published date: 01 May 2009

Convergence of Corporate Governance: Critical

Review and Future Directions

Toru Yoshikawa* and Abdul A. Rasheed

ABSTRACT

Manuscript Type: Review

Research Question/Issue: Convergence in corporate governance across countries has been a subject of interest and

controversy in a variety of disciplines. We attempt to address a number of related research questions: (1) what constitutes

convergence? (2) what are the drivers that propel corporations in different nations towards convergence? (3) what are the

major impediments that stand in the way of convergence? (4) what empirical evidence do we have to suggest that we are

moving towards or away from convergence? and (5) what would be some productive avenues for further research on this

topic?

Research Findings/Results: Despite the vigorous intellectual position of the proponents of convergence, there is only

limited evidence to indicate that such convergence is actually occurring. Even when there is ostensible convergence, much

of it is convergence in form rather than substance, and governance convergence is not a context-free phenomenon.

Theoretical Implications: Our review of the past literature suggests that increasing integration of product and capital

markets is leading to changes in corporate governance around the world, but there is only limited evidence that such

changes constitute convergence. Governance changes seem to be primarily attributable to the quest for greater eff‌iciency in

governance and enhanced legitimacy in capital markets. However, local forces such as institutional embeddedness and

politics can hinder governance changes or create “hybrid” practices.

Practical Implications: The ideal corporate governance may be institution- and f‌irm-specif‌ic and an imposition of new

practices or standards may not lead to intended policy or performance outcomes.

Keywords: Corporate Governance, Convergence, Board of Directors, Capital Markets

INTRODUCTION

In recent years, there has been considerable controversy

about both the desirability and inevitability of conver-

gence in the governance practices of public corporations.

The normative case for such convergence was most force-

fully made by Hansmann and Kraakman (2001). They argue

that there is already a normative consensus that is inducing

corporate law and practice to converge towards the share-

holder value maximization model. This is because alterna-

tives such as the managerial-, labor-, and state-oriented

models are not viable competitively in globally integrated

product markets. Similarly, the search for low-cost capital

also forces f‌irms to comply with the shareholder value maxi-

mization model. Furthermore, they argue that the share-

holder model creates and sustains a supportive ideological

and political consensus in its favor.On the other hand, many

other researchers have pointed to the diff‌iculties involved in

bringing about convergence in corporate governance

(Bebchuk and Roe, 1999; Guillen, 2000; Gilson, 2004).

Researchers who study patterns of change in economic

systems argue that economic institutions tend to adapt

foreign practices to f‌it local institutional contexts (Djelic,

1998; Vogel, 2003). This suggests that increasing globaliza-

tion will likely lead to hybridization, rather than conver-

gence (Pieterse, 1994). Yet others have even questioned the

wisdom behind pushing for such hybridization.

Regardless of how one perceives the inevitability or desir-

ability of convergence of corporate governance practices

around the world, important changes have indeed been

occurring in corporate governance systems in all major

industrialized and even emerging countries in recent years

(e.g., De Nicolo, Laeven, and Ueda, 2008). These changes

present great opportunities for researchers in various disci-

plines such as economics, strategy, and organization theory

to explore international corporate governance at both the

*Address for correspondence: ToruYoshikawa, DeGrooteSchool of Business, McMas-

ter University, 1280 Main Street West, Hamilton, ON, Canada L8S 4M4. Tel: 905-525-

9140 Ext.20090; E-mail: yoshikat@mcmaster.ca

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© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00745.x

institutional and f‌irm levels. In fact, the causes and conse-

quences of such changes and the process of changes are

attracting increasing research attention.

In this review paper, we attempt to address a number of

related research questions on the issue of convergence on

the basis of extant scholarship on the subject. First, what

constitutes convergence? Second, what are the drivers that

propel corporations in different nations towards conver-

gence? Third, what are the major impediments that stand in

the way of convergence? Fourth, what empirical evidence do

we have to suggest that we are moving towards or away

from convergence? Finally, what would be some productive

avenues for further research on this topic? To answer these

questions, we review research in various academic disci-

plines that have seen growing interest on the topic of con-

vergence, namely, f‌inance, economics, law, and management

and organization theory.

WHAT IS CONVERGENCE?

Broadly speaking, in the context of corporate governance,

convergence refers to increasing isomorphism in the gover-

nance practices of public corporations from different

countries. Such a def‌inition is too general and complete

isomorphism is unlikely even among f‌irms within a country.

Hence, from the point of view of a researcher, it is important

to have more operationally clearer def‌initions of conver-

gence. Researchers have made a distinction between conver-

gence in form and convergence in function (Gilson, 2004).

Convergence in form relates to increasing similarity in terms

of legal framework and institutions. Convergence in func-

tion suggests that different countries may have different

rules and institutions but may still be able to perform the

same function such as ensuring fair disclosure or account-

ability by managers. Functional convergence, which La

Porta, Lopez-de-Silanes, Shleifer and Vishny (2000: 20)

describe as “decentralized, market-driven changes at the

f‌irm level,” of corporate governance practices appears to be

occurring with greater regularity.

Khanna, Kogan and Palepu (2006) recently made a dis-

tinction between de jure convergence and de facto con-

vergence. When two countries adopt similar corporate

governance laws, there is de jure convergence between

them. When actual practices converge (i.e., practices are

actually implemented), it is referred to as de facto conver-

gence. This distinction can be illustrated with an example

from a different f‌ield. All countries have rules against

bribery and corruption. That is, there is de jure convergence.

However, the actual prevalence of corrupt practices and

enforcement of the rules against such practices vary signif‌i-

cantly across countries, suggesting that there is no de facto

convergence. A similar notion is decoupling where an actor

claims conformity or adoption, yet implements a new prac-

tice differently or does not actually implement it (Meyer

and Rowan, 1977; Fiss and Zajac, 2004). Yet another type of

convergence mentioned in literature is contractual conver-

gence (Gilson, 2004). 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 examina-

tion of convergence it is important to be clear about what

kind of convergence we are discussing.

Any discussion about convergence is incomplete unless

we are able to specify what the entities in a given group are

converging towards. To illustrate, a statement that Japanese

and American governance is converging could mean a

number of different things. First, it could mean that Ameri-

can governance practices are becoming more like Japanese

practice. Second, it could mean that Japanese governance is

becoming more like American governance. Third, it could

mean that both are converging towards the midpoint

between them. Finally, it could also mean that both systems

are moving towards some kind of a normative ideal that is

very different from their current positions. Despite these

possibilities of convergence, the extant literature generally

examines convergence in terms of the adoption of some

elements of the Anglo-American or US governance system

and practices by countries and f‌irms outside the Anglo-

American zone (e.g., Reed, 2002; Khanna and Palepu, 2004;

Khanna et al., 2006; exceptions include Toms and Wright,

2005). Previous research has examined, for example, the

adoption of good governance codes at the institutional level

(e.g., Aguilera and Cuervo-Cazurra, 2004) and various

outsider- or market-oriented practices such as independent

directors, stock-based executive compensation, and greater

corporate information disclosure (Tuschke and Sanders,

2003; Fiss and Zajac, 2004; Markarian, Parbonetti and

Previts, 2007; Sanders and Tuschke, 2007), the key elements

of the Anglo-American model, at the f‌irm level. Table 1 pro-

vides an illustrative listing of the various dimensions of

convergence that have been examined in empirical studies.

One of the sources of strength as well as confusion in

convergence research is the issue of what is converging. The

TABLE 1

Convergence Dimensions in Corporate Governance

Research: An Illustrative List

Level Dimensions

Institutional/

National

Level

1. Adoption of good corporate governance

codes

2. Legal reform or regulatory changes

• Requirement of outside directors

• More stringent disclosure

• Greater protection of minority

shareholders and creditors

• Relaxed takeover rules

3. Country level changes

• Spread of CEO option pay

• Trend in hostile takeovers

• Presence of institutional investors

Firm Level 1. Adoption or increase in the number of

outside directors

2. Greater information disclosure

3. Adoption and coverage of executive

stock option pay

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Volume 17 Number 3 May 2009© 2009 Blackwell Publishing Ltd