The Role of International Corporate Governance Essay (Critical Writing)

Introduction

The importance of good corporate governance has been gaining global recognition for decades¹. In the United Kingdom, the Stewardship Code 2012² attempts to influence the role of institutional investors and the levels of communication or stewardship of monies they have invested on behalf of their clients. These institutional investors operate on a global level³. In this critical discussion essay, it is assessed whether global corporate governance should be regulated formally by international treaties and the like, or should be left to evolve organically.

Corporate Governance

Corporate governance is presently widely instilled as a benchmark of how well organizations are managed.⁴ It is an indicator of future developments for potential investors and speculators to assess the quality of organizational management and the adequacy of its board. Accordingly, governments contending to pull in foreign capital for economic advancement have heightened their emphasis on corporate governance to ensure more secure and more appealing capital markets.⁵

Nonetheless, the absence of cohesive rules and regulations among nations results in an intricate oversight labyrinth of benchmarks for corporate boards.⁶ If the corporate boards fail, they place their organizations at danger of governmental action or shareholder intercession. Thus, it is imperative to understand the present aspects of global corporate governance.

It is widely recognized that corporate governance is changing, especially for multinational firms. The basic explanation behind a renewed, and now almost worldwide, concentration on corporate governance is the requirement for general economic growth, stability and more secure capital markets. In the United States, for instance, expanded government control was prodded mainly by threatening huge corporate scandals involving major corporations like Enron, WorldCom, and others, the 2002 recession, and the tech bubble burst where many tech firms failed.

Additionally, one should assess the main, self-inflicted scandals at major corporations, such as the Volkswagen emission scandal involving falsified data, Wells Fargo that got involved in illegal opening of customers’ accounts, or at the News Corp in which editors unlawfully hacked a phone to obtain private data for public consumption.⁷ After all these experiences, the US government swung vigorously into action by enacting Sarbanes-Oxley Act to shield investors from distorted, creative accounting practices.

Government regulations are the major ways through which corporate governance practices are created, and from a global perspective, these norms differ substantially, according to Mark Roe’s ‘politics school’. It is observed that the US corporate governance model focuses on managers using a board of directors that represents other outside shareholders and stakeholders whose rights are safeguarded by a wide range of institutional principles.⁸

These institutional rules, for instance, include ones for antitrust, insider trading, and an open market and by government institutions and watchdog agencies to ensure standard accounting practices, bond rating, and security exchange protection. In this model, shareholder rights are superior to the claims of managers, customers, and suppliers. The German model, on the other hand, focuses managers by ensuring concentrated proprietorship in blockholders, allowing insider connections to thrive, permitting significant horizontal coordination among stakeholders, and tolerating a wide range of stakeholder claims on the firm other than those of the shareholders.

Additionally, Japan, Sweden, Austria, and other European nations, have adopted some elements of the German model to some extent, while the some elements of the US model are noted across the UK, Ireland, Australia, Canada, and New Zealand. Further, corporate governance in Africa continues to evolve, but it is marred with myriad of challenges, including poor implementation, favor, fear, and lack of objective reporting.⁹ These variations are therefore interesting if one wishes to develop global corporate governance.

Corporate Governance Changes

To understand current trends and challenges concerning the global corporate governance issues, it is imperative to determine why and how of the changes within the global context. According to a recent study by Farient Advisors showed how trends in the global corporate governance are changing in three major areas, namely executive compensation, board structure and compensation, and rights of shareholders.¹⁰

The result of this survey indicated that although emphasis on corporate governance is generally strengthening globally, corporate governance principles still vary considerably by nation. Additionally, Howard observed that the recent global financial crisis have influenced thoughts on executive compensation globally.¹¹ For instance, in North America and Western Europe, lawmakers, voters, and shareholders have increasingly expressed their concerns about executive pay. Hence, Europe and the US have introduced new regulations, including shareholders’ votes, tax incentives to reduce basic pay, and strict caps on bonuses in attempts to curtail the rising executive compensation package.¹²

First, executive compensation is seen as an area that influences aspects of global corporate governance. Overall, various aspects of statutory conditions and generally acceptable best practices have significant influences on corporate governance. Today, standard operating procedures (SOP) and guidelines are reality in most advanced nations, majorities of which hold compulsory SOP votes. There are, in any case, a few nations, including Ireland, Belgium, Germany, Canada, and, that do not necessarily insist on mandatory SOP votes. Even so, many public firms in these nations still adhere SOP requirements.

For instance, in Canada, about 80% of public traded firms conduct yearly SOP votes. Countries like South Africa, China, Singapore, and Mexico that lack SOP vote now seriously considering its relevance in corporate governance. Across Europe and the UK in particular, the new disclosure and voting obligations enacted through the new Companies Act posed more new reporting and governance issues on executive pay issues. Nonetheless, the UK and Europe have noted positive outcomes on voting in support of the new policy and annual reporting on executive compensation, but in the coming years, more pressure and business risks are expected from more regulation from the UK and the European Union parliaments.¹³

Other than the SOP requirement, many countries now companies to disclose executive compensation. However, it is noteworthy that the statutory disclosure regulations differ considerably by nation. Regular issues explored for executive remuneration include furnishing investors with clear information on pay elements, performance objectives, and rationale for decisions made pay. Howard also noted that in Asia, executive compensation has skyrocketed, in most instances with no or little oversight by government agencies or legal regulatory institutions. Further, countries in various regions around the globe control executive pay in different manners.

Overall, the notable trends in the global corporate governance include enactment of stiff legal requirements to manage executive pay, especially in the West while Asian regions strive for self-regulation, and the application of executive compensation reforms through votes and attempts to restrict shareholder democracy. Howard pointed out that these regional variations do not merely reflect a country’s or cultural best business practice from executive compensation viewpoint, they also act as standards against which it is possible to evaluate changes in the corporate governance globally.

Second, board structure and composition also shape the discourse on global corporate governance. Of all the board features, board autonomy, or having directors who are not associated with the organization’s senior management officials, is thought to be a fundamental component of board viability. Many companies across the global have a significant percentage of a board with some levels of autonomous directors and some countries advocate for a different chairperson or CEO of a firm.¹⁴

Unlike like executive remuneration, which is frequently determined by regulatory measures, board composition is for the most part determined by best practices. Shareholders have expressed their sentiments and recommended principals by organized endeavors, which have then been willfully embraced by organizations. Accordingly, non-statutorily based best procedures have risen from various sections to advance aspects of executive compensation.

For instance, many organizations have embraced some aspects of control to restrict the tenure of directors.¹⁵ Another interesting issue in board constituent as of late has been the diversity of the board. In some countries, diversity is not only considered as a matter of public interest and policy, but also seen as a great business idea by conveying different perspectives to business issues. Although diversity from the standpoint of gender is a statutory obligation in a few nations, standards or practices for diversity, characterized by sex, race, ethnicity, and age, as well as abilities, are, as a rule, willfully supported in different nations.

Third, aspects of shareholder rights are a critical issue in corporate governance. In fact, it is the most challenged and disputable driver of corporate governance in both the domestic and global context. In the United States, there has been a general move throughout as reflected in the last 15 years in an attempt to extend shareholder rights or governance structures, which allow investors to take certain actions that serve their own best interests.

At present, advanced nations, including the UK, Germany, Ireland, Belgium, Switzerland, and the US, are the pioneers in shareholder rights.¹⁶ Across Europe, for example, shareholders’ votes play a critical role corporate governance, including decisions on executive compensation and strategic objectives.¹⁷

For instance, proxy access, a system that permits qualified investors who possess a requisite fraction of shares over a specified timeframe to designate director candidates, was nearly not available five years prior. At present, however, proxy access is now found in most US corporations. While western nations are driving the noted patterns in shareholder rights, it creates the impression that organizations around the globe are slowly taking after and embracing more shareholder-oriented practices.

A striking case of this is the virtual end of the “poison pill”, which ultimately restricts or eliminates unfavorable practice used by organizations to stop or deject hostile acquisitions and takeovers.¹⁸ In 2012, however, Netflix, for instance, adopted the stockholder rights plan with the poison pill to stop activist shareholders who were planning a hostile takeover through purchasing a huge volume of shares of the company without approval from the company’s board.¹⁹ Carl Icahn targeted Netflix for a hostile takeover, but the company planned to apply the poison pill approach to limit potential acquisition. Many different ranges of friendlier practices are declassified board, single class shares, and majority vote guidelines.

A Focus on Driving Change in Corporate Governance

As more effort and collective conscience involving corporate governance elevate, organizations are endeavoring to comprehend what aspects of corporate governance standards will be important for shareholders. In this regard, global corporate governance takes shape organically when there is a need. When an improvement to corporate governance is justified, directors ought to create a governance change guideline. The guideline will align the board on a definitive objective and identify specific processes leading to the attainment that objective.

For instance, if a board establishes that it would gain meaningful by meeting certain highest aspects related to its composition based on diversity, then it might confirm that a given fraction of its board members ought to be women and other minorities for a specific period. It might then evaluate the suitable processes to get the best outcomes, including introducing term limits, policy on age, ethnicity, conducting persuasion exercise, and even increasing board membership for other interests. Beginning with a view of an unmistakable end can transform corporate governance.

Corporate Governance and International Treaties

Regardless of whether socially responsible conduct by organizations ought to be influenced using international law has been discussed since the 1960s, according to Kamminga.²⁰ It was first proposed that private companies are members in the development of present day international law, while other scholars contended that multinational organizations have no international rights and obligations since states – whatever their ideological viewpoint – are hesitant to give them international status.²¹

From Ruggie’s viewpoint,²² the United Nations (UN) often looks at global corporation with reference to human rights. The UN attempts to introduce laws to regulate global firms can be traced to the disastrous Code of Conduct debates that began in the mid-1970s and were discarded more than years after. At the begin of a new century, the UN Sub-Commission on the promotion and Protection of Human Rights, including independent specialists, started drafting new regulations to protection human right.

The new laws were intended to bind firms and ensure that they committed to advance, protect the satisfaction of, respect, demonstrate regard of and protect human rights. These obligations were basically within a similar scope of obligations that countries have acknowledged for themselves under international treaties that they have enacted and different based on minimal variations based on secondary and primary roles, which equally lack any clear distinctions.

This debate has been lively to say the least. Specifically, the development of multinational organizations in the past recent decades has been paralleled by issues to determine methods for controlling the malicious effects on human rights by the continually expanding number of organizations whose corporate presence extends across many countries and beyond the scope of conventional corporate regulatory instruments.²³

In this case, many human rights groups have always raised concerns about potential effects on human rights of multinational firms whose presence beyond the domestic market is not under any regulatory requirements that meet their global status. The consistent advancement of social orders and expectations will continue to face global corporations. These social orders allude that organizations ought to respect international human rights requirements.

Hence, countries should embrace broader methods to deal with protection of human rights by transforming the nature and opportunities of building up a solid base on which corporations may be held accountable for possible cases of human rights abuse. In this case, such laws are currently not supported by the current international laws and, therefore, it would be futile to apply international treaties on corporate governance with the aim of protecting human rights. Instead, the UN should formulate and enact new international treaties for human rights and corporate governance on human rights.

Alternatively, the body can let such laws evolve organically. At present, what is witnessed is a process involving re-control in which state and non-state actors are using a system involving private and public regulations to enhance the structure for corporate governance compliance. That is, no regulations exist. As such, the international laws of corporate action regarding human rights need a variety of partners and an extremely diverse mixture of private and public laws that might be hard to copy effortlessly in various sectors, countries, and cultural limits, implying that one single regulation can apply to corporations with global presence.

Backer observed that a framework, the Financial Stability Board (FSB) developed by the G20 alludes to a future where governance systems involve collaborative structures between the state and private actors, and the state shares lawmaking privileges with the public and other private non-state actors.²⁴

It further alludes to governance as a structure involving collegial organizations where the state and conventional law-based systems work alongside other non-stat actors and their regular systems to establish cohesive governance with international attributes and influence.²⁵ Hence, a restructured new form of structures could well emerge, one where combinations of the most vital states and private regulatory organizations affirm their power once set aside for states only.

As the fierce debate continues on a binding international treaty, it has been observed that a wide division has emerged between the global south (supporters) and Europe and other countries within the Organization for Economic Co-operation and Development (OECD) (opposing).²⁶

Largely, civil society movements advocate for the negotiation of a binding international treaty while corporations, in general, have opposed it. In the recent past, the predominant perspective of international bodies, for example, the UN, the International Labor Organization (ILO), the OECD, and the EU was that corporate social responsibility is an issue that can best be left to the industry to self-regulate. The thinking among these global bodies was that if global corporations required any form of standard or supervisory guideline, then it ought to be of a soft, willful in nature. Obviously, the corporations themselves likewise unanimously upheld this thinking.

International Legal Obligations and Global Corporations

Within the domestic context, corporations are considered as legal persons and, therefore, have legal obligations to meet, particularly in labor and environmental provisions, and in most cases, they are held accountable for any breaches under such laws. Actually, no firm can be imprisoned by they face sanctions and fines.²⁷ From international law or treaties, no single clause applies to firms for their wrongful acts. Additionally, it cannot be assumed that corporations adhere to the same requirements as individuals or states within the international sphere. It is imperative to point that the current international treaties do not apply to corporations, but rather they apply member states, which are required to enforce them.

However, it is noted that states may be unwilling or unable to hold corporations accountable for their actions. With regard to corporate social responsibility, for example, it is difficult for any state to enforce them because they are intended as best practices within an industry. Furthermore, as scramble among states increases for foreign direct investment because of globalization, states may find it hard to reject powerful corporations with more revenues than their annual national income. They may also be unwilling to enforce such regulations because of potential collusion with corrupt regimes to meet their goals.

Based on the above observations, therefore, it is necessary to introduce an international binding regulation on companies to protect human rights and environments.²⁸ This approach could be the best to handle possible abuse of human rights by corporations. However, one must understand that actually governments and organizations alike have ignored to formulate relevant standards to protect human rights and environments.

Meanwhile, corporate advocates have done everything conceivable to ensure the standards remain utterly voluntary, implying that they do not have to be held accountable.²⁹ It is obvious then, that for the minorities and other people whose rights are abused, little has changed for many decades. Hence, people whose lives have been negatively impacted to corporate activities are now far much worse than ever.

Today, for instance, any party that wishes to hold any firm accountable based on the UN principles or the weak OECD guidelines will obviously fail because those regulations are not binding.³⁰ From such observations, global entities, such as Amnesty International now support the creation of a treaty on corporation, human rights, and environment protection because countries are expected to protect human rights from all forms of abuse and negligence, including ones caused by companies. Thus, the current international law must be expanded to account for corporate governance within the global context.

It is imperative to define the role of the state in such a treaty with regard to corporate governance where multinational firms are involved. As mentioned above, states may be unable or unwilling to enforce such regulations. In such instances, the treaty should clearly establish how states and a multinational firm interact. Additionally, the UN may perhaps consider an international body to enforce any violations. For instance, the International Criminal Court (ICC) now handles crime that many states have failed to handle within their systems.

Conclusion

Corporate governance is now an important indicator of how well organizations are being managed. Governance practices that assess the suitability of a board of directors and management have turned into critical aspects of evaluating corporations for shareholders around the world. Within the global context, governance practices, principles, and execution differ broadly from state to state. As such, various oversight issues persist for board of directors.

In light of this, multinational firms are expected to have a progressive board to assess practices beyond the domestic sphere. This study shows that executive compensation, shareholder rights, and composition and structure of the board are major factors shaping some aspects of the global corporate governance. Additionally, some aspects of global corporate governance have evolved, such as executive compensation, ‘poison pill’, shareholder voting, and others have changed, but they differ from region to region. More regulations are expected across Europe, for instance, to manage executive pay and improve financial governance internationally.³¹

With regard to international treaties and corporate governance, it is established that the current international treaties do not bind any corporations for their wrongful actions, and states may be unwilling or unable to enact currently available UN provisions. As such, corporate governance principles should be left to grow organically, rather than applying international standards, which are not binding.

Reference List

Al-Hosban, AAS & Al-Fawwaz, TM 2015, ‘The role of internal control to deal with corporate governance in information technology environment in commercial banks’, Global Journal of Management and Business Research, vol. 15, no. 5, pp. 8-20.

Backer, LC 2011, ‘Private actors and public governance beyond the state: the multinational corporation, the financial stability board and the global governance order’, Indiana Journal of Global Legal Studies, vol. 18, no. 2, pp. 751-802.

Barry, JM & Hatfield, JW 2012, ‘Pills and partisans: understanding takeover defenses’, University of Pennsylvania Law Review, vol. 160, no. 3, pp. 633-713.

Cheffins, BR 2010, ‘The Stewardship Codes’ Achilles’ Heel”’, Modern Law Review, vol. 73, no. 6, pp. 985-1025.

Curcio, A & Latham, R 2014, ‘Corporate governance and executive compensation in the UK and Europe: A glance back and looking ahead’, HR Matters, no. 6, pp. 8-11.

Falkner, R., 2016. The Paris Agreement and the new logic of international climate politics. International Affairs, 92(5), pp. 1107-1125.

Ferracone, R 2016, ‘Three drivers of global corporate governance you can’t ignore‘, Forbes. Web.

Financial Reporting Council 2012, The UK Stewardship Code, Wolters Kluwer, United Kingdom.

Gatti, M 2014, ‘The power to decide on takeovers: directors or shareholders, what difference does it make?’, Fordham Journal of Corporate & Financial Law, vol. 20, no. 1, pp. 73-144.

Goh, CF, Rasli, A & Khan, S-U-R 2014, ‘Corporate governance: a literature review with a focus on the technology firms’, Procedia – Social and Behavioral Sciences, vol. 129, pp. 39-45. Web.

Goldman, D 2012, Netflix adopts poison pill to fend off Icahn. Web.

Gourevitch, PA 2003, ‘The politics of corporate governance regulation’, Yale Law Journal, vol. 112, no. 7, p. 1829.

Howard, C 2013, ‘International executive compensation and corporate governance: how a cross-cultural analysis of executive compensation regulation shows diverging trends in corporate governance’, Richmond Journal of Global Law and Business, pp. 1-14.

Kamminga, MT 2004, ‘Corporate obligations under international law’, 71st Conference of the International Law Association, plenary session on Corporate Social Responsibility and International Law’, Berlin, pp. 1-6.

Moloney, N 2017, ‘The European Union in international financial governance’, The Russell Sage Foundation Journal of the Social Sciences, vol. 3, no. 1, p. 138–152.

Mukherjee, AS 2016, ‘Why we’re seeing so many corporate scandals‘, Harvard Business Review. Web.

Nolan, J 2014, ‘Refining the rules of the game: the corporate responsibility to respect human rights’, Utrecht Journal of International and European Law, vol. 30, no78, pp. 7–23. Web.

Onukwuli, AG 2014, ‘Corporate governance practices and regulatory agencies on the performance of government establishments in Sub-Saharan African’, European Journal of Business and Management, vol. 6, no. 17, pp. 1-7.

Pugliese, A, Bezemer, P-J, Zattoni, A, Huse, M, Van den Bosch, FAJ & Volberda, HW 2009, ‘Boards of directors’ contribution to strategy: a literature review and research agenda’, Corporate Governance: An International Review, vol. 17, no. 3, pp. 292–306.

Robinson, S 2014, ‘International obligations, state responsibility and judicial review under the OECD Guidelines for multinational enterprises regime’, Utrecht Journal of International and European Law, vol. 30, no. 78, pp. 68–81. Web.

Ruggie, JG 2014, ‘Global governance and “new governance theory”: lessons from business and human rights’, Global Governance, vol. 20, pp. 5–17.

Shetty, S 2015, ‘Corporations have rights: now we need a global treaty on their responsibilities‘, The Guardian. Web.

Tricker, B 2015, Corporate governance principles, policies and practices, 3rd edn, Oxford University Press, United Kingdom.

von Braun, J & Birner, R 2016, ‘Designing global governance for agricultural development and food and nutrition security’, Review of Development Economics, Web.

Wouters, J & Odermatt, J 2013, Comparing the “four pillars” of global economic governance: a critical analysis of the institutional design of the FSB, IMF, World Bank and WTO, Working Paper No. 128, KU Leuven, Leuven.

Footnotes

1. Bob Tricker, Corporate Governance Principles, Policies and Practices (3^rd edn, OUP 2015).
2. Financial Reporting Council, The UK Stewardship Code (Wolters Kluwer, 2012).
3. Brian R Cheffins, “The Stewardship Codes’ Achilles’ Heel” (2010) 73(6) MLR 985-1025.
4. Goh, CF, Rasli, A & Khan, S-U-R 2014, ‘Corporate governance: a literature review with a focus on the technology firms’, Procedia – Social and Behavioral Sciences, vol. 129, pp. 39-45. Web.
5. Ferracone, R 2016, ‘Three drivers of global corporate governance you can’t ignore’, Forbes. Web.
6. Al-Hosban, AAS & Al-Fawwaz, TM 2015, ‘The role of internal control to deal with corporate governance in information technology environment in commercial banks’, Global Journal of Management and Business Research, vol. 15, no. 5, pp. 8-20.
7. Mukherjee, AS 2016, ‘Why we’re seeing so many corporate scandals’, Harvard Business Review. Web.
8. Gourevitch, PA 2003, ‘The politics of corporate governance regulation’, Yale Law Journal, vol. 112, no. 7, p. 1829.
9. Onukwuli, AG 2014, ‘Corporate governance practices and regulatory agencies on the performance of government establishments in Sub-Saharan African’, European Journal of Business and Management, vol. 6, no. 17, pp. 1-7.
10. Ferracone, R 2016, ‘Three drivers of global corporate governance you can’t ignore’, Forbes. Web.
11. Howard, C 2013, ‘International executive compensation and corporate governance: how a cross-cultural analysis of executive compensation regulation shows diverging trends in corporate governance’, Richmond Journal of Global Law and Business, pp. 1-14.
12. Ibid, pp. 1-14.
13. Curcio, A & Latham, R 2014, ‘Corporate governance and executive compensation in the UK and Europe: A glance back and looking ahead’, HR Matters, no. 6, pp. 8-11.
14. Ferracone, R 2016, ‘Three drivers of global corporate governance you can’t ignore’, Forbes. Web.
15. Ibid.
16. Ibid.
17. Pugliese, A, Bezemer, P-J, Zattoni, A, Huse, M, Van den Bosch, FAJ & Volberda, HW 2009, ‘Boards of directors’ contribution to strategy: a literature review and research agenda’, Corporate Governance: An International Review, vol. 17, no. 3, pp. 292–306.
18. Gatti, M 2014, ‘The power to decide on takeovers: directors or shareholders, what difference does it make?’, Fordham Journal of Corporate & Financial Law, vol. 20, no. 1, pp. 73-144.
19. Goldman, D 2012, Netflix adopts poison pill to fend off Icahn. Web.
20. Kamminga, MT 2004, ‘Corporate obligations under international law’, 71st Conference of the International Law Association, plenary session on Corporate Social Responsibility and International Law’, Berlin, pp. 1-6.
21. Ibid, pp. 1-6.
22. Ruggie, JG 2014, ‘Global governance and “new governance theory”: lessons from business and human rights’, Global Governance, vol. 20, pp. 5–17.
23. Nolan, J 2014, ‘Refining the rules of the game: the corporate responsibility to respect human rights’, Utrecht Journal of International and European Law, vol. 30, no78, pp. 7–23. Web.
24. Backer, LC 2011, ‘Private actors and public governance beyond the state: the multinational corporation, the financial stability board and the global governance order’, Indiana Journal of Global Legal Studies, vol. 18, no. 2, pp. 751-802.
25. Wouters, J & Odermatt, J 2013, Comparing the “four pillars” of global economic governance: a critical analysis of the institutional design of the FSB, IMF, World Bank and WTO, Working Paper No. 128, KU Leuven, Leuven.
26. Shetty, S 2015, ‘Corporations have rights: now we need a global treaty on their responsibilities’, The Guardian. Web.
27. Kamminga, MT 2004, ‘Corporate obligations under international law’, 71st Conference of the International Law Association, plenary session on Corporate Social Responsibility and International Law’, Berlin, pp. 1-6.
28. Von Braun, J & Birner, R 2016, ‘Designing global governance for agricultural development and food and nutrition security’, Review of Development Economics. Web.
29. Falkner, R., 2016. The Paris Agreement and the new logic of international climate politics. International Affairs, 92(5), pp. 1107-1125.
30. Robinson, S 2014, ‘International obligations, state responsibility and judicial review under the OECD Guidelines for multinational enterprises regime’, Utrecht Journal of International and European Law, vol. 30, no. 78, pp. 68–81. Web.
31. Moloney, N 2017, ‘The European Union in international financial governance’, The Russell Sage Foundation Journal of the Social Sciences, vol. 3, no. 1, p. 138–152.