Corporate Governance and Corporate Competitiveness: an international analysis

• Date: 01 March 2005
• Published date: 01 March 2005
• DOI: http://doi.org/10.1111/j.1467-8683.2005.00419.x
• Author: Chi‐Kun Ho

CORPORATE GOVERNANCE AND CORPORATE COMPETITIVENESS

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CORGCorporate Governance: An International

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CORPORATE GOVERNANCE AND

CORPORATE COMPETITIVENESSCORPORATE GOVERNANCE

*Address for correspondence:

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Corporate Governance and Corporate

Competitiveness: an international

analysis

Chi-Kun Ho*

Empirical studies of corporate governance and corporate competitiveness tend to focus on

specif‌ic dimensions of these two sets of corporate conditions. The f‌indings on their

relationships are mixed and inconclusive. This study uses a questionnaire to survey corporate

conditions on a holistic basis, with a sample of international companies. My f‌indings provide

strong evidence that f‌irstly, most international companies conform to good corporate

governance practices; secondly, the higher such conformance is to good corporate governance

practices, the stronger is the f‌irm’s competitiveness; thirdly, the relationship between corporate

governance and corporate competitiveness is much stronger when corporate governance is

evaluated on a holistic basis than on an individual dimension or attribute; and f‌inally,

corporate governance attributes are inter-related and it is more appropriate to pursue or study

them on a collective basis.

Keywords: Corporate governance, corporate competitiveness, impact of good corporate

governance practices, survey of international companies, evaluation on a holistic basis

Introduction

nternational guidelines perceive that good

corporate governance assures accountabil-

ity and improves performance, and is a source

of competitive advantage. However, empirical

studies of the relationships between corporate

governance and corporate performance have

been mixed and inconclusive in their f‌indings.

One common characteristic is that these

studies focus restrictively on specif‌ic dimen-

sions or aspects of corporate governance and

corporate competitiveness. This study there-

fore examines these two sets of corporate con-

ditions on a holistic basis, using a sample of

international companies.

The research question for the study is:

Would good corporate governance practices

lead to higher corporate competitiveness? The

specif‌ic objectives of this study are to f‌ind out

I

what constitutes good corporate governance

practices according to international guidelines

and studies, to what extent do international

companies conform to such practices, and the

relationships between the conformance to

good corporate governance practices and the

measures of corporate competitiveness.

The next section discusses, through a litera-

ture review, the gaps to be addressed in this

study, and the dimensions and key elements

of good corporate governance and corporate

competitiveness. The third section describes

the theoretical framework, the survey ques-

tionnaire and other aspects of the research

design. The fourth section summarises and

analyses the f‌indings from the survey, in par-

ticular the patterns of corporate governance

and competitive conditions of the sample

companies, and the relationship between these

two sets of conditions. The f‌inal section dis-

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cusses the results and draws implications and

suggestions for both practice and future

research.

Literature review

Corporate governance has attracted consider-

able attention over the past decades, leading

to recommended codes of practice, conceptual

models and empirical studies. Based on a

review of the literature, corporate governance

is def‌ined for this study as the structure and

processes among the board of directors,

shareholders, top management and other

stakeholders, and involves the roles of the

stewardship process and exercising strategic

leadership, and the objectives of assuring

accountability and improving performance

(Mueller, 1981; Cadbury Committee, 1992;

Tricker, 1994; Shleifer and Vishny, 1997;

Dunlop, 1998; Sternberg, 1998; OECD, 1999).

Internationally, many corporate governance

guidelines and codes of best practices have

been published by supra-national agencies

(e.g. the Commonwealth Guidelines (CACG,

1999); the OECD (1999) Principles; the World

Bank Framework for Implementation, 1999),

national regulatory bodies (e.g. the French

Vienot Commission’s Recommendations

(AFG-ASFFI, 1998 and amended 2001); the

German Code (GPCG, 2000); the Japanese

Principles (CGFJ, 1997 and revised 2001);

the UK Combined Code of Best Practice

(CCGUK, 2000)), and non-regulatory institu-

tions (e.g. the CalPERS (1997 and revised

1999) Principles and Guidelines; the TIAA-

CREFF (2000) policy statement; the European

Shareholders Association’s Guidelines (ESA,

2000); the International Corporate Gover-

nance Network’s Statement (ICGN, 1999); the

Business Roundtable (1997) Statement). Fol-

lowing the latest corporate scandals including

Enron, World.com and the like, many of

these codes have been revised in the last few

years. The website of European Corporate

Governance Institute (http://www.ecgi.org)

provides a full list of these international

guidelines.

The multiplicity of corporate governance

guidelines ref‌lects that alternative governance

mechanisms exist among countries due to

their different traditions and cultures. They

bear some signif‌icant structural differences,

for example, single vs 2-tier boards, CEO dual-

ity vs separation of chairmanship and CEO

role, majority executive vs non-executive

directors. However, in the age of globalisation,

countries and businesses alike have become

integrated and interdependent through eco-

nomic liberalisation, de-regulation, privatisa-

tion, dismantling of barriers, global trade and

capital f‌low, and internationalisation of pro-

duction process, cross-border mergers and

takeovers. As corporations expand their oper-

ations and investments internationally, a more

adaptable governance system is needed to

cope with the increasing diversity of cultures,

customers, competitors, economic and legal

environments, and the more diverse and dis-

persed management teams. Firms, in particu-

lar large multinational corporations, are

adopting increasingly the best practices of

existing systems so as to improve corporate

eff‌iciency and to attract capital funds (Maher

and Andersson, 1999; Mentzer, 1999; Prahalad

and Oosterveld, 1999; Ahunwan, 2003). The

OECD Principles (OECD, 1999) and the Com-

monwealth Codes (1999) are the joint efforts of

nations in this regard: they respect differences

in the national frameworks and cultures, and

yet articulate common sets of underlying prin-

ciples publicly traded companies should fol-

low (Millstein, 2000). The ICGN Statement

(ICGN, 1999), on the other hand, presents the

joint efforts of the private sector, comprising

institutional investors, companies, f‌inancial

intermediaries, academics and other parties. It

endorses and amplif‌ies the OECD principles

with a “working kit” on how the principles

can best be implemented.

There are also competing models about the

effect of globalisation on corporate gover-

nance. Ahunwan (2003) summarises three

models in this regard:

•Convergence thesis: Economic eff‌iciency

under globalisation will ultimately pressure

corporate governance structures and be-

haviour around the world to converge in

terms of the rules and forms, or in terms

of the functions (Bradley

et al.

, 1999; Coffee,

1999; Hansmann and Kraakman, 2001).

•Path-dependence model: The evolution of

corporate governance system is path-

dependent, with the national history trajec-

tories and political considerations standing

as strong barriers to convergence (Aoki and

Patrick, 1994; Baums, 1994; Bebchuk and

Roe, 1999).

•Hybrid model: A third group of scholars

believe some convergence towards a hybrid

model based on harmony and adoption of

best practices among the countries (Carati,

Guido and Rad, 1999; Cunningham, 2000).

Notwithstanding these comparative models

of global corporate governance, how do

multinational corporations operate? Are their

corporate governance practices signif‌icantly

different, or are they adopting converging

practices or harmonising with the best prac-

tices? This study addresses these questions by

CORPORATE GOVERNANCE AND CORPORATE COMPETITIVENESS

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surveying the corporate governance practices

of a sample of international companies.

The proliferation of corporate governance

guidelines ref‌lects also the great importance

attached by governments, business entities

and communities alike to the subject. These

guidelines commonly perceive that good cor-

porate governance is very important in

assuring accountability and improving

performance. Typically, the guidelines make

recommendations on appropriate board struc-

tures and processes that protect the interests

of the owners, and reconcile them with those

of management and other stakeholders,

including the communities within which they

operate. Good governance practices enable

corporations to use their capital eff‌iciently,

maintain the conf‌idence of investors and

attract more patient, long-term capital. It

enhances strategic focus, builds market conf‌i-

dence and community support, and is an

important source of corporate competitive

advantage (OECD, 1999; World Bank, 1999).

Although international guidelines argue,

explicitly or implicitly, that good corporate

governance is associated with corporate com-

petitiveness, theoretical and empirical studies

of corporate governance practices and their

effects have not provided uniform or conclu-

sive evidence in this regard.

During the last decade, theoretical studies

have produced a series of conceptual models

explaining the causal relationships between

corporate governance and corporate perfor-

mance. These include the behavioural agency

model (Wiseman and Gomez-Mejia., 1998), the

f‌inance model (Shleifer and Vishny, 1997;

Demirag

et al.

, 1998), the participative model

(Collier and Esteban, 1999), the policy gover-

nance model (Carver, 1999), the political

model (Pound, 1992; Schwab and Thomas,

1998), the stakeholder model (Buchholz, 1992;

Donaldson and Preston, 1995), the steward-

ship model (Tricker, 1994; Davis

et al.

, 1997;

Keasey and Wright, 1997), and the strategic

leadership model (Simons, 1995; Charan, 1998;

Davies, 1999; Forbes and Milkien, 1999). As

shown in Table 1, these models examine the

subject from the different perspectives of a

f‌inancier or other stakeholders.

Empirical studies of the relationship be-

tween corporate governance and corporate

performance focus on specif‌ic dimensions or

attributes of corporate governance. Important

aspects frequently studied include: the board

structure and composition; the role of non-

executive directors; other control mechanisms

such as director and managerial stockhold-

ings, ownership concentration, debt f‌inancing,

executive labour market and corporate control

market; top management compensation; capi-

tal market pressure and short-termism; social

responsibilities; and internationalisation. As

observed by several surveys of these empirical

studies, the f‌indings have been mixed and no

f‌irm conclusion can be drawn from them

(Agrawal and Knoeber, 1996; Lin, 1996;

Shleifer and Vishny, 1997; Keasey and Wright,

1997; Bhagat and Black, 1999; Gugler, 1999;

Maher and Andersson, 1999; Cravens and

Wallace, 2000; Hamilton, 2000). Table 2 pro-

vides a summary of some major studies over

the past 10 years, showing the mixed f‌indings

on the relationship between specif‌ic attri-

butes of corporate governance and corporate

performance.

In contrast to the international guidelines,

which prescribe a desirable corporate gover-

nance system as a whole, the conceptual

models and empirical studies examine only a

particular perspective or part thereof. There is

a shortage of studies that evaluate corporate

governance practices on a collective basis

against corporate performance or broader

dimensions of corporate competitiveness.

Bhagat and Black (1999) observe that studies

focusing on only one directorial task have an

inherent limitation, and tell us relatively little

about how board composition affects overall

f‌irm performance. Cravens and Wallace (2000)

note that relatively little attention has been

directed to the overall effect of the combina-

tion of attributes of the board from an em-

pirical perspective, and it is diff‌icult to draw

conclusions as to the effectiveness of corpo-

rate governance and its impact without con-

sidering all the attributes in totality. Demirag

et al.

(2000) observe that effectiveness of cor-

porate governance framework depends on

the interactions among the alternative gover-

nance mechanism, and therefore a piecemeal

approach is fraught with unhealthy implica-

tion. Any evaluation of the effectiveness of

the corporate governance framework requires

not only a mapping of the range of gover-

nance mechanisms available but also the iden-

tif‌ication of the potential interaction among

them.

In addition, effectiveness of corporate gov-

ernance has been gauged mainly by perfor-

mance measures in most past studies.

However, such measures alone cannot fully

ref‌lect a company’s competitive advantage or

competitiveness, which encompasses present

and future conditions and abilities of produc-

ing superior products and services with better

prices and quality, yielding long-term and sus-

tainable economic benef‌its. Corporate com-

petitiveness incorporates, on the basis of the

studies of Buckley

et al.

(1988), a f‌irm’s poten-

tial and process of competitive advantage,

ability to sustain performance such as market