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Convergence
During the economic boom of the 1990s, in which rapid technological advance played an important role in enhancing global communication and integration, one could perhaps be forgiven for associating globalisation with progress. This is particularly true in the realm of finance and capital markets which during the 1990s and 2000s have seen technological advancements enabling 24 hour trading across world markets, the development of complex financial instruments such as futures and options, and improved access to trading resources online. Both market capitalisation and trading volume of major stock exchanges around the world have increased dramatically over this period, although Anglo-American stock exchanges maintain an overwhelmingly dominant position. In terms of market capitalisation, the New York Stock Exchange (NYSE Euronext) was over three and a half times the size of its nearest rival (Tokyo) at the end of 2009, and the NYSE Euronext and Nasdaq maintained the highest number of shares traded, followed by the exchanges in Shanghai and Shenzhen (World Federation of Exchanges, 2010). As corporations in Anglo-American jurisdictions rely upon stock markets for financing and discipline, there is debate over whether this growth in capital markets marks the global ‘roll-out’ of Anglo-American corporate governance, with wholesale adoption of Anglo-American corporate governance institutions in other jurisdictions simply being a matter of time.
Hansmann & Kraakman’s (2001) The End of History for Corporate Law presented an argument that not only advocated convergence towards the Anglo-American model, but also asserted that such convergence has already occurred. Their argument for convergence followed three stages. Firstly, the shareholder model is shown to be superior to ‘manageroriented’, ‘labour-oriented’, or ‘state-oriented’ models. Secondly, the superior shareholder model will dominate over competing models, as it is considered to be more efficient in an environment in which the internationalisation of markets is increasing. Thirdly, the shareholder model will be upheld by political change, in which a shareholder class (represented by dispersed share ownership) will ensure that claims from other factions (such as employee groups and powerful individual shareholders) are resisted.
The debate, however, is not so clear cut. Firstly, Hansmann & Kraakman’s paper was written before the corporate governance failures of the Anglo-American model, in the form of the stock market crash and the failures of Enron, WorldCom and others. Based on the growth of the 1990s, it could perhaps be over-optimistic and caught up in the same ‘irrational exuberance’15 that afflicted investors before that crash. The failures in corporate governance point instead to the fallibility of the Anglo-American market-oriented model and serve as a warning to other countries in which capital markets are becoming more prominent. Secondly, Hansmann & Kraakman’s simple analysis of the superiority of the shareholder model can be criticised. Clarke (2007, p.261) notes how companies such as Toyota and Airbus, within stakeholder, insider oriented systems, have outperformed their rivals in the USA in recent years. Similarly, the economic growth of Germany, Japan, South-East Asian countries and more recently China and India, all of which occurred within non-Anglo-American corporate governance models, illustrates how growth and competitiveness is certainly not the preserve of Anglo-American companies. The fact that American companies were looking to emulate successful German and Japanese business practices in the 1980s reiterates how economic ‘superiority’ can swing from decade to decade. Schleifer and Vishny’s (1997) comprehensive survey of corporate governance practices (although focused exclusively on the agency problem) concludes that both legal protection and large investors characterise good corporate governance systems, and that it is not possible to identify one particular model as the ‘best’. La Porta et al. (1998) examined the legal and financing structures of 49 countries, and conclude that legal families (such as common versus civil law) and legal rules cause different financing (and, by implication, corporate governance) regimes. Coffee (2001) suggests, however, that the correlation between legal families and financing patterns can rather be explained by postulating the legal arrangements as a consequence of the financing arrangements.
In contrast to Hansmann & Kraakman’s argument for a strong form of convergence, Bebchuk and Roe (1999) presented a theory of path dependence to explain why certain corporate practices (particularly legal and ownership structures) differ and persist across different countries. They present two kinds of path dependence, structure-driven and rule-driven, both of which serve to restrict the process of corporate change and convergence. In addition, socalled ‘institutional complementarities’, referring to the wider elements of socio-economic systems, need to be considered when adopting elements of different corporate governance models (Gordon & Roe, 2004, p.6; Clarke, 2007, p.259). Jacoby (2002, p.20) notes that it would be difficult to transfer a particular corporate governance practice from one context to another and expect it to function effectively. He suggests, for example, that introducing USstyle takeover mechanisms of disciplining management in Germany or Japan would be “highly disruptive of managerial incentive and selection systems presently in place. Hostile takeovers also would be disruptive of relations with suppliers and key customers, a substantial portion of which exist on a long-term basis” (p.21).
The convergence debate is also more complex than simply analysing trends towards the Anglo-American model. Thomsen (2003) argues a ‘mutual convergence hypothesis’ claiming that alongside convergence towards the Anglo-American model, corporate governance in the USA and UK has moved towards the European model in some ways. The increase in share ownership concentration, financial deregulation, greater attention to wider stakeholder concerns, and how the increased emphasis on independent non-executive directors could be seen to reflect aspects of the two-tiered board structure are provided as examples. He acknowledges however, that differences will remain for decades, and Jacoby (2002, p.31) notes that just as path dependence and institutional complementarities reflect the persistence of European and Japanese models, these factors make it extremely unlikely that Anglo-American jurisdictions would eventually adopt a stakeholder, insider orientation.
The King reports on corporate governance
The approach to corporate governance adopted in South Africa has been presented in chapter two (section 2.4). Accordingly, this section does no more than highlight the areas in which the approach can be considered unique, or different to the Anglo-American approach that has influenced corporate structures and corporate law in South Africa. Some evidence on sustainability reporting is also considered as this provides one practical example of the impact of corporate governance reforms in South Africa. King II (published in 2002) emphasised an ‘inclusive’ stakeholder approach in which directors were specifically called to be responsible to stakeholders. Review of the report (West, 2006) identified some evidence that the approach was not simply a means of increasing shareholder wealth, but was supported by appeal to both the socio-economic imperatives of South African society and to certain traditional African values (such as ubuntu, see section 3.3 below).
King III (published in 2009) clarified the approach (now termed ‘stakeholder inclusive’) and specifically noted that shareholders do not have priority over other stakeholders. Little mention was made of traditional African values; the principal motivations appear to be a growing awareness of the need for sustainability, as well as the socio-economic conditions of South Africa.
Both reports provide detail on sustainability reporting and communication with stakeholders, with King III also emphasising sustainability performance and requiring sustainability reporting to be better integrated with financial reporting. Both reports do, however, retain many of the features of Anglo-American corporate governance, such as single-tiered boards and a financial reporting framework (IFRS) that is oriented towards shareholders. To a certain extent the King reports on corporate governance do, therefore, present an approach to corporate governance that is distinct from the traditional Anglo-American shareholder orientation, in which shareholders are given primacy and shareholder wealth is always maximised. Sustainability reporting is one area in which the impact of these reports can be considered. Unlike traditional financial reporting which is oriented towards shareholders, sustainability reporting (including triple-bottom line reporting and CSR reporting) is more stakeholder inclusive. The Global Reporting Initiative (an organisation providing standards and guidelines on sustainability reporting) describes sustainability reporting as “the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development” (Global Reporting Initiative, 2006, p.3). AccountAbility (another such organisation) advocates the value of accountability and describes it as obliging organisations “to involve stakeholders in identifying, understanding and responding to sustainability issues and concerns, and to report, explain and be answerable to stakeholders for decisions, actions and performance” (AccountAbility, 2008, p.6). As the King reports are distinctive in their emphasis on sustainability reporting and stakeholder inclusion, one way of considering how this emphasis is reflected in practice is by considering the level of South African sustainability reporting.
According to KPMG’s International Survey of Corporate Responsibility Reporting 2008, 86 percent of South African companies provided some level of CSR reporting, and this is attributed partly to the influence of King II (KPMG International, 2008, p.93). South African companies also display a relatively high level of integration, where the CSR report is included in the annual report (2008, p.15). However, of the 100 largest companies in South Africa, only 45 had a CSR report, whether integrated or stand-alone (2008, p.16). This is significantly less than countries such as Japan (93 of Japan’s largest 100 companies), the UK (91), Brazil (78), the USA (74) and the Netherlands (63). Consequently, although the King reports may have a distinctive emphasis on sustainability reporting, South African practice in this respect lags behind that of other countries.
Chapter 1: Moral relativism and corporate governance convergence – a research agenda
1.1 Theoretical background
1.2 Research agenda
1.3 Chapter outline
Chapter 2: Corporate governance models and their morality
2.1 Theoretical distinctions
2.2 The Anglo-American model
2.3 The Continental European and Japanese models
2.4 Other models
2.5 Convergence
2.6 Conclusion
Chapter 3: Existing evidence of South African moral judgements
3.1 The King reports on corporate governance
3.2 The African Renaissance and NEPAD
3.3 The traditional South African morality of ubuntu
3.4 Cross-cultural studies
3.5 Conclusion
Chapter 4: Researching differences in moral judgements
4.1 Structured questionnaire survey
4.2 Semi-structured interviews
4.3 Conclusion
Chapter 5: Differences in moral judgement – survey evidence
5.1 The views of professional accounting students in South Africa
5.2 The views of professional accounting students of different racial groups
5.3 Exploratory analysis
5.4 Conclusion
Chapter 6: Perceptions of professional accounting students
6.1 The extent of corporate obligations
6.2 Specific stakeholder groups
6.3 Corporate priorities
6.4 Traditional African values
6.5 White interviewees
6.6 Interviewees originating from Kenya
6.7 Conclusion
Chapter 7: Metaethical moral relativism and corporate governance convergence
7.1 The meaning of Metaethical moral relativism
7.2 Is there a single, morally superior model of corporate governance
7.3 Evidence of reasonable and impartial agreement
7.4 Arguments supporting Metaethical moral relativism
7.5 Conclusion
Chapter 8: Normative moral relativism and corporate governance in South Africa
8.1 Findings relevant to the claims of Descriptive and Metaethical moral relativism
8.2 The implications for Normative moral relativism
8.3 Practical implications and future research possibilities
8.4 Conclusion
List of references
