Concepts ofCG
According to Ungerechts (2014, 6) the “dynamic profusion of multifarious codes, guidelines, and principles” encouraged all European Union (EU) member states to introduce CG Codes. Such codes are “soft law” and do not have the status of statute but supplement legislation and take “effect through the voluntary acceptance of obligations by the companies affected.”13 As Hopt (2013) concluded in his discussion of comparative CG, there maybe “a great deal of convergence, but many path-dependent differences14 remain”
(p. 99).
To appreciate the path-dependent differences, although direction and control are the lynchpins of a corporate system, CG approaches found in different countries vary (Hopt 2013, 10). In the United States and the United Kingdom, a shareholder-oriented approach is largely espoused, whereas a stakeholder-oriented CG system is found in continental Europe, Japan, and India, for example (see Devinney, Schwalbach, and Williams 2013). However, there are significant differences between countries in the prevailing shareholder constituency as well. “Berle-Means corporations” (i.e., characteristics by “separation of ownership and control”) are very common in the United States and the United Kingdom but not in the Netherlands, for example, while family corporations and block holdings characterize countries in continental Europe (Hopt 2013, 11). In the United States, “while publicly traded corporations are concerned about issues of social responsibility, the focus of shareholder primacy greatly influences policy and the law” (Pinto and Gevurtz 2013, 1045). In addition, the company board, termed by Hopt (2013, 28) as “the most prominent actor in corporate governance,” tends to be one-tiered in some countries (i.e., the shareholders elect the board, which is tasked with overseeing control and direction of operations), while in others, such as the Netherlands, Germany, China, Austria, and Portugal, a two-tiered board (i.e., separate management and supervisory boards) is mandatory.
The reader should note in this context that (a) the trend toward independent directors in the United Kingdom is conducive for functional convergence between the one- and two-tiered systems and (b) there is no convincing evidence that one system is better than the other (Hopt 2013, 31). It should also be noted that, although Section 172 of the Companies Act introduced the principle of “enlightened shareholder value” by broadening the “stakeholder” interests that directors should regard in implementing their legal duty to promote their company’s success, the UK Governance Code15 is exclusively concerned with protecting the shareholders. The rights of shareholders in the United Kingdom are provided in the Companies Act of 2006 and in the Model Articles set out in the Companies (Model Articles) regulations of 2008.16 Concerning the comparison of CG in the United Kingdom and the United States, Simon Graham17 investigated the two systems and what happens when the two come into contact. He concluded that “several company law cases and controversies illustrate that Anglo-American corporate governance is, if not a myth, then a fallacy. More than one US court has illuminated a series of stark differences between respective directors’ duties of care.”18
Concerning the concept of CG, it has been argued that in advancing reasons why CG deserves serious and creative thought, Starbuck (2014) noted that “it was scholarly debates, especially during the late 19th and early 20th centuries, that established the difference between partnerships and corporations” (p. 15). An interesting argument put forward by Starbuck is that the term governance is problematic because of the conflicting approaches that could be adopted. More specifically, he argued first that a single category of CG cannot accommodate the heterogeneity of corporations and, consequently, large multinationals (what he termed global corporations) deserve “special thought and distinctive policies” (p. 16) mainly because of the potential future benefits and not so much because of how they behave at present. Second, there are incompatibilities both between short-term and long-term consequences of governance approaches and between nations and large multinationals, and in light of such basic conflicts, Starbuck maintained that “humanity needs to set priorities among goals” (p. 15). Third, for governance proposals to be useful by the time they are implemented, they need to factor in expected changes in societies and technology. Finally, one can contribute to creating better corporations through effective governance by focusing discussions of governance not so much on boards of directors but on management hierarchies. Starbuck went on to propose that we create global corporations that behave as global citizens, value long-term consequences and not shortterm ones, and consider the survival of humanity to be more important than a single person, corporation, or nation (p. 18). To this end, he is of the view that we must invest in managerial governance against the backdrop of the ongoing internationalization process, whereby multinationals increasingly come to rely on native-born executives from a particular country where a corporation has operations, which in turn diffuses a corporation’s identity and reduces its propensity to exploit a host nation (p. 20).
Concluding his discussion of CG, Hopt (2013) asserted, inter alia, that CG has played a major role at stock exchanges in the shadow of the law and especially soft law by means, for example, of the “comply or explain” approach. In addition, its key concern is the protection of shareholders, stakeholders, and of course labor, bearing in mind that “corporate governance rules are only as good as their enforcement” (p. 99). Finally, there are variations internationally concerning the role of courts in CG (pp. 97—99).
Much of the current interest in CG centers on mitigation of the conflicts of interests between stakeholders, both internal and external to a company, and civil servants and other stakeholders. “Tangled loyalties” were addressed as early as 1872 in the Swiss city of Basel, where a member of the Great Council, the Grosser Rat, had to abstain from voting in matters he or his immediate family had a personal vested interest in. The reason for this was because almost since the Middle Ages the city was governed by a few families “colloquially referred to as the ‘the dough’ (der Teig) of Basel” (Peters and Handschin 2012, xiii). Conflicts of interest maybe “conflict between due and undue... interests, a conflict due to multiple roles of the agent, and a conflict arising from the existence of multiple principles” (Peters 2012,4). Palazzo and Rethel (2005) distinguished personal from impersonal conflict of interest, with the former being due to the professional behavior of one located in the principle-agent relationship and the latter relating to “the organizational structure” (p. 12). Of course the conflict-of-interest situations would not arise if one acts in the best interest of the principal with a duty of loyalty arising from the fiduciary obligation owed to the other party.
