The United States and European Union are often considered to have the gold standard in corporate governance. The reputations, however, may start to fall short of reality as even the most insular countries get on board with best practices in governance.
There are, of course, many ways that Western nations have deserved their reputation as trendsetters for shareholder rights and board oversight. Increasingly, however, other countries —including China, Brazil, South Africa, and Saudi Arabia—are beginning to catch up to, if not improve upon, those efforts.
Corporate governance trends and practices around the world are converging is the conclusion drawn by Farient Advisors, an executive compensation and performance consultancy, in a new report prepared in conjunction with the Global Governance and Executive Compensation Network, a coalition of similar firms around the world.
To reach that thesis, the study, “2017 Global Trends in Corporate Governance,” examined developments in executive compensation, shareholder rights, and board composition.
“Not only is the focus on governance intense in most venues, it is expected to increase in about two-thirds of those countries surveyed, including those with a currently weak or moderate focus,” the report says. “This means that common standards for good governance are likely to rise as well.”
Fueling the convergence? Money.
“The primary reason for a renewed and now nearly global focus on corporate governance is the need for systemic economic stability and safer capital markets,” the report says. “Countries are competing for a finite amount of investor capital. Emerging and mature countries alike are working with investors to ensure their capital markets are sufficiently safe to effectively attract foreign and domestic investment.”
“The trend toward stricter governance practices around the world is unmistakable and growing,” it adds. “Investors are increasingly proactive in influencing governance change to protect their investments.”
While governance is generally intensifying around the world, countries still differ in significant ways. The current focus on governance is rated as intense in most developed countries, particularly in the United States and Europe, and moderate in many Asian countries and Brazil, the report says. Mexico is viewed as having a weak focus on governance, while China is viewed as weak but improving.
“The trend toward stricter governance practices around the world is unmistakable and growing. Investors are increasingly proactive in influencing governance change to protect their investments.”
2017 Global Trends in Corporate Governance
In particular, China is attempting to raise its profile in the corporate governance arena. For example, some Chinese State-owned enterprises are addressing governance issues by establishing external boards, giving greater authority to these boards, and promoting mixed ownership structures.
“You see things like enhanced disclosures and shareholder rights, and a real push for board independence,” says John Trentacoste, managing director of Farient Advisors, of global governance trends.
“Where you see divergence is the way countries flavor those key areas. The U.S. and U.K. have taken a best-practices approach to gender diversity, but you have some countries—Germany, Norway, and even India—that are far more prescriptive and even statutory about it.”
Countries like China, Saudi Arabia, and India “want to make their borders more figurative than literal,” he says. “In order to do that and have the most fertile capital market the requirement is increased governance. They are getting the picture that in order to compete for global investment dollars they need to really make sure their corporate governance is in good stead.”
There is a trend, Trentacoste says, of corporate governance evolution accompanying a scandal or market downturn. “Poor corporate governance can send shockwaves around the system,” he says. “Think of Brazil with the Petrobras scandal. It could be an isolated incident, but it really casts a specter of doubt over Brazilian companies. One way to right that ship is to show that there is a focus on good corporate governance and show they are serious about safeguarding their capital markets.”
“What might have once been, ‘Oh, those silly westerners with their corporate governance requirements,’ has really become a blueprint for being competitive in a global economy,” he adds.
One area where the United States lags behind other countries is separation of the chairman and CEO roles. “It is an international best practice, if not mandate,” Trentacoste says. “But seems to be a U.S. phenomenon that those two roles are combined. International investors can’t figure out why we would do that.”
Another area where the United States falls short of practices in other nations is requiring gender diversity on boards. Statutory requirements pertaining to gender diversity exist in Belgium, Germany, India, and Norway, while best practice norms for diversity, broadly defined by gender, race, ethnicity, age, and skills, tend to be supported in such countries as Australia, Brazil, Canada, Singapore, South Africa, Sweden, Switzerland, the United Kingdom, and the United States.
When it comes to statutory requirements regarding executive compensation—disclosures, say on pay, severance, clawbacks—even with the reforms of the Dodd-Frank Act, the United States. checks fewer boxes than Belgium, India, and Australia.
For better or worse, depending on your point of view, the United States is more reliant on the counsel of proxy advisory services, but that too may change over time.
While proxy advisers provide voting recommendations across all of the countries covered by the study, their influence is significant in only about a quarter of them. Countries in which proxy adviser influence is considered to be significant include the United States, Canada, Switzerland, and Australia. Countries in which proxy advisor influence is deemed to be minimal include China, Hong Kong, Mexico, and South Africa.
The report notes that there are few statutory requirements regarding board composition globally, but best practices are emerging, even if they do vary. For example, in some countries, like Brazil, Sweden, and the United Kingdom age limits are prohibited as they are deemed to be tantamount to age discrimination. Limits on director tenure tend to be company-specific.
How susceptible are governance advancements to geopolitical shifts? Even in the United States., there is the uncertainty created by the incoming Trump Administration’s vow to gut the Dodd-Frank Act. Similarly, Brexit, the U.K.’s split from the European Union, could have consequences.
“Most of what we see in corporate governance is really penned in ink,” Trentacoste says.
One reason is that many standards have grown organically, a byproduct of shareholder pressure. “There is tons of investment capital behind sustainability issues, for example, and a lot of consumer pressure,” Trentacoste says. “That’s not coming from the government; it is coming from the people who buy products and invest in stocks. Even without regulatory pressure or a formal mandate, a lot of issues have taken care of themselves, including proxy access and clawbacks. How shareholders vote with their dollars can be much stronger, and swifter, than legislation.”
How should multinational firms approach the diverse, yet converging, global governance landscape? For starters, companies need to study global trends to see what could be on the horizon.
“It would also behoove companies to look at their current governance practices in three categories: shareholder rights, executive compensation, and the board,” Trentacoste says. “Look at your standards compared to the most stringent global standards and ask, ‘Is this where we really want to be?’ If the answer differs from either the U.S. best practices or global standards, you may need to explain to your shareholders why you think your approach is best. If you engage with a global shareholder base, they are going to be wondering how your policies adhere to their ideas about corporate governance.”