Examples of mechanisms used in some countries

A look at the codes that many countries use reveals the diversity and multiplicity of mechanisms that are in use in OECD countries to bring about corporate governance. Australia, for example, has as its codes the Stock Exchange Corporate Governance Council, Principles of Good Corporate Governance and Best Practice Recommendat io ns (2003) and the IFSA Corporate Governance (2002). The instruments or mechanis ms mentioned are ‘comply or explain’; principle balance of authority within the board, disclosure of division of responsibility, professional competence of members and the ability to exercise independent judgment; separation of chair and CEO, establishment of board committees with majority independent directors, ethics oversight, greater shareholder involvement, transparent compensation tied to corporate and individ ua l performance, and protection for whistle blowers (OECD Survey, 2004, p. 44).

Canada has different codes and instruments. For example, there are disclosure requireme nts and guidelines, which included the Toronto Stock Exchange, March 2002; and General

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Acceptance of the Saucier Report, except independent board leader as a listing requirement, disclosure of governance directives, and shareholder approval of option plans. Other instruments include management supervision by the board of directors, boards of directors composed of and chaired by outside (non-executive) directors, and establishme nt of audit committees, consisting only of outside directors (OECD Survey 2004, p. 45).

Finland has only codes, which include the Chamber of Commerce/Confederation of Finnish Industry and Employers Code and Ministry of Trade and Industry Guidelines. Germany’ codes include the Berlin Initiative Code and Germany Panel rules. The instruments or mechanisms used include balance of power within and between management and supervisory boards, compensation tied to corporate performance and seniority, establishment of supervisory board committees, and facilitation of shareholder voting (OECD Survey, 2004, p. 46). Germany also makes use of company and group law considering shareholder protection, disclosure and transparency and board compositio n, responsibilities and remuneration.

In Korea, the code is Code of Best Practice for Corporate Governance, 2003. The instruments or mechanisms used include improvement of shareholder participat io n, information and vote at AGM, at least 1/4 outside directors, cumulative voting to ensure representation of minority shareholders, establishment of committees, audit committee chaired and consisting of 2/3 outside directors, and disclosure of all information material to shareholders’ decisions. In 2003, Korea introduced an update consisting of the new mechanisms. These new mechanisms are ‘comply or explain’; listing; differe nt requirements for large and small firms; outside directors independent from controlling families; minimum number of such directors; fair disclosure and greater role for outside directors in audit; and instructions to exercise voting rights and disclose (OECD Survey, 2004, p. 47).

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Thomsen and Conyon (2012) point out that there are many governance mechanisms, and they call attention to informal governance, which includes social norms, reputation/tr ust, codes, regulation by corporate laws, boards and incentive schemes. These authors also

mention ownership, which can involve blockholders, shareholder activism and

stakeholders, and stakeholder pressure, which could be applied through monitoring by creditors, auditors, analysts and competition (Thomsen & Conyon, 2012). From looking at Canada, Finland, Germany, and Korea, one could appreciate the diversity of available mechanisms and the creative ways in which companies can use them in order to address the variety of issues raised in the 2004 Principles of Corporate Governance.

Some of the principles that have been outlined by the OECD have been incorporated into their codes. The 2004 OECD Principles of Corporate Governance outline the importance of reforms to the system as new practices come to the fore. The U.K. has been carrying out changes that reflect the changes introduced in the OECD Principles. For example, in the OECD Principles, it is noted that there should be a separation of the chair’s position from that of the CEO: “Separation of the two posts may be regarded as good practice, as it can help to achieve an appropriate balance of power, increase accountability and improve the board’s capacity for decision making independent of management” (OECD, 2004, p. 63). The U.K. has adopted this policy in its UK Combined Code (2012), where the two roles of board chair person and CEO are made separate (U.K. Combined Code, 2012, p. 4).

The general values underlying corporate governance are those of “fairness, accountability and transparency” (Dion, 2005, p. 195). According to Dion (2005), every corporate governance system must have “(a) an orientation towards Justice-itself through the actualisation of the following values: fairness, integrity and objectivity; (b) an orientatio n towards Truth-itself through the actualisation of values of openness, trustfulness, and transparency; (c) the orientation towards harmony through attitudes of collaboration, care and diligence” (p. 195). These values are an integral part of the 2004 OECD Principles of Corporate Governance, and the OECD, through collaboration with OECD and non-OECD

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countries, is able to inspire trustfulness among investors in various nations. When countries adopt the Principles, they are hoping to inspire trust in those with whom they have business relations.

2.10 Summary

Section 2.2 provided a short historical overview of OECD, while Sections 2.3 and 2.4 described a historical background of corporate governance development in the OECD countries and short history of the corporate governance reforms within the OECD context. Section 2.5 discussed the two main governance systems in the OECD, namely, the Anglo- American or Shareholding Corporate governance model and the Continental European or Stakeholding Corporate Governance model, with Sections 2.5.1 and 2.5.2 describing these systems in greater detail. Section 2.6 and subsections 2.6.1, 2.6.2, and 2.6.3 describe the accounting, cultural and legal systems in these models, while Section 2.7, and subsections 2.7.1 and 2.7.2 described the ownership structures and debt structures associated with the Anglo-American and Continental models. Section 2.8 and subsections 2.8.1 to 2.8.6 describe the corporate governance mechanisms related to OECD corporate governance. Section 2.9 discusses examples of mechanisms used in some countries, and Section 2.10 summarises the chapter.

This chapter has also considered how the OECD Principles can affect corporate governance in countries with different accounting and legal systems, and in terms of cultural practices. It has distinguished between the countries that have the Anglo-American system, namely, U.K., U.S., Canada, Australia and Ireland, and those that follow the Continental system tradition. It has further shown that the Anglo American countries follow the common law, which means that its legal accounting, cultural and legal characteristics differ from the Continental system tradition and is based on civil law legal traditions and that are influenced by the accounting, cultural and legal traditions. These two systems differ in the institutions that develop and in the ownership and debt structures that exist in these

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countries. What has been revealed is that these differences have an impact on existing corporate governance. The Anglo-American countries are more aggressive (masculine), tend to be individualistic, to provide greater protection for its investors, and are more amenable to risks. The continental system countries tend to be more passive (femini ne) collectivist, to provide less protection for investors, and are less amenable to risks.

With these different countries utilising the Principles, the OECD has tried to be flexible in order to accommodate the different political, cultural, and economic systems that are using the Principles. However, with the request for greater guidance with respect to implementation, the OECD revised its Principles which have laid out specific mechanis ms that are useful in implementation. Yet, it must be noted that because of differences in the countries, there would be different structures to accommodate these mechanisms. The result would be different manifestations of these mechanis ms. It was also noted that corporate governance depends to a great extent on the relationships that exist among stakeholders, with owners increasingly demanding to have a voice in corporate governance in some countries, particularly the common law countries and with owners having too much control in the civil law countries and thereby having little protection for other shareholders. With different stakeholders, the area of developing good governance practices is an area in which the Principles would continue to evolve. It was shown that the two main discussed, the Anglo-American and the Continental, differ with respect to some of the important characteristics of corporate governance.

The following chapter will discuss how organisations carry out their operations using corporate governance functions. Considering the mechanisms that these two systems have in place, the following chapter will discuss the theories that help explain how corporate governance is achieved. What will be shown in the chapter are the different explanat io ns provided by the theories to demonstrate how the organisations from these countries support corporate governance.

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