Corporate Governance Mechanisms Throughout the World

By William Judge
Editor in Chief

There are a wide variety of governance mechanisms used throughout the world. Previous literature has suggested that economies vary in terms of their emphasis on formal rules versus informal relationships (Li & Samsell, 2009), but this begs the question as to what rules and what relations guide governance activities. In Anglo-American economies, for example, the primary governance mechanism is the equity market (Saberwal & Smith, 2008). In Western European and some Asian economies, however, the primary governance mechanism is relatively concentrated ownership patterns via pyramidal ownership structures (Levy, 2009). However, Scandanavian economies appear to rely on social norms and expectations to a great extent (Stafsudd, 2009). In transition economies, like China, the primary governance mechanism is the state and informal networks (Shen & Lin, 2009). In India, business groups
provide accountability, especially in the larger firms (Zattoni, Pedersen, & Kumar, 2009). Notably, Islamic nations primarily rely on Sharia law to curb and guide business decisions (Safieddine, 2009). Of course, all of these characterizations are generalizations, and there are many exceptions to these observations within a particular economy (Wu, Xu, & Yuan, 2009). Furthermore, the game is constantly changing and there is convergence and divergence overtime within and between nations (Yoshikawa & Rasheed, 2009). As we seek a global
theory of international corporate governance, one of our goals is to describe and better understand the relative effectiveness of these mechanisms. In this issue, our understanding of many of these mechanisms grows substantially. For example, Judge, Li, and Pinsker (2010) in our lead article seek to explain why some nations adopt International Financial Reporting Standards (IFRS) in full, partially, or not at all across 132 economies. Arguing that adoption of IFRS standards is largely a legitimacy-seeking process, they find that nations replace
domestic GAAP standards with IFRS standards in response to coercive, mimetic, and normative pressures. Next, Wong, Chang, and Chen (2010) seek to explain how
the market responds to corporate venturing announcements in Taiwan. Taiwan is an interesting economy where family ownership is the primary governance mechanism. Using
agency logic, these authors explore the role of nepotism and ownership type to explain market reactions to corporate ventures. They find that the greater divergence between
cash flow and voting rights, the lower the abnormal returns resulting from venturing announcements. Also, they report that the degree of family control is also negatively related to degree of abnormal returns. Interestingly, the level of institutional ownership moderates these relationships. The third article by Chen, Elder, and Hung (2010) also focuses on the governance environment in Taiwan, where more than half of the listed firms are concentrated in high technology industries. Chen and associates seek to understand the relationship between institutional environment, ownership and earnings management. Using contracting
theory, they find that managers in high growth firms are more likely to engage in earnings management since it is harder to monitor their internal activities than managers in relatively low growth firms. Building on the concept of “investment opportunity set”, they show that Taiwanese managers tend to take advantage of asymmetric information through discretionary accruals. Rost and Osterloh (2010) redirect our attention to corporate governance in the aftermath of the global financial crisis. Using the upper echelons perspective, they theorize that financial experts will perform better in stable and predictable economic environments, but that more diverse collections of financial and non-financial experts will perform better in turbulent financial environments. Furthermore, they argue the male-dominated teams will perform better in “normal” situations, but that more gender diverse teams will perform better in “abnormal” conditions. In essence, the theoretical argument is that team diversity functions best in turbulent situations. Interestingly, they provide two studies which support their predictions. The first study is comprised of 479 students in Switzerland in a laboratory experiment where the students were asked to predict the future stock price of UBS bank. The second study is a field study which examined the top management teams of 30 banks in Switzerland. Both studies largely confirm the predictions leading to rather robust and novel insights. Finally, Chen, Chung, Hsu, and Wu (2010) refine our understanding of the corporate governance-firm value relationship within the United States. Using longitudinal data from 1990 to 2005, they predict that the corporate governance-firm value relationship is strongest for those firms with a high external financing need and relatively weak otherwise. Indeed, they do find external financing need to be positively related to the quality of corporate governance mechanisms in the firm, and that the greater the external need, the stronger the relationship. However, they report that firm value is positively related to subsequent internal corporate governance quality, not vice versa. As such, this longitudinal dataset confirms some expectations and creates some new questions to be explored. I commend this issue to your reading pleasure, and encourage you to refine and extend these insights. Many thanks to all the authors, reviewers, and editors who helped to pull this issue together. It clearly is a global team effort as we collectively seek to make our mark on the global
economy.