A Critical Analysis of Corporate Governance System Convergence

This report undertakes a critical review of the convergence of corporate governance (CG) systems, exploring the debate surrounding the existence and extent of this convergence. It begins by defining CG and discussing its increasing importance due to the separation of management and ownership. The report examines various perspectives on CG, including its role in resource allocation and stakeholder value creation. It then delves into the arguments for and against convergence, referencing studies that support and refute the idea of a unified global CG code. The report identifies key drivers of convergence, such as financial market integration, the diffusion of codes of conduct, and the harmonization of accounting standards. Conversely, it also highlights the impediments to convergence, including path dependence, institutional complementarities, and variations in social norms. The conclusion emphasizes that the convergence of corporate governance is a complex phenomenon, influenced by a multitude of factors and perspectives. The report provides a comprehensive overview of the current state of research on this subject.

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Critical Review on convergence of corporate governance

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Introduction
Aguilera, Judge and Terjesen, (2018), stated that corporate governance is the procedures which
include rules, guidelines, and structure with which the company control and direct the business
operations and manage the interest of the stakeholders of the company. According to Salvioni,
Franzoni, Gennari and Cassano, (2018), convergence of CG refers to growing isomorphism in
the practices of corporate governance. Corporate governance improves the organization’s
stakeholder’s values by the process of accountability of leaders and board members. The
company keeps corporate governance practices towards achieving the goal of the company and
meet the expectations of the company’s powerful stakeholders. As it helps in decreasing the
conflict of and reduces the issues between agent and principle into the organization. Good
corporate governance is the key aspect of many organizations’ success. Since the past two years
many researchers focusing on the debate of the existence of convergence of CG system. Some
researcher founded the existence of convergence, in contrast, some other claims that there is no
existence of convergence of governance practices.
This report will cover the notion of corporate governance and provide an evaluation of
convergence from a different perspective and link them factors that drive and impediment the
convergence of CG system.
Critical review on Convergence of corporate governance
Part 1: Existence of corporate governance
According to Jacoby, (2018), from past some years the significance of corporate governance
arises due to the separation of management and ownership of the interest. The interest of the

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directors and manager reflecting each other and arise the many issues. This resulting
disagreement and miscommunication between the board members and shareholders of the
company. Although there is no specific meaning of CG it can be assessed from a different
perspective. With the Hussain, Rigoni, and Orij, (2018), point of view CG is the process of
allocation of the capital resources, ownership, remuneration schemes, the board of directors, all
the committees and pressure of the other stakeholders such as investors and suppliers also
competition environment. Overall governance defines how companies lead directors to make a
decision in respect of such matters. It is the way with which the company’s suppliers assure that
they are getting the return on investment or not. While assessing the convergence of corporate
governance Davo, Martínez and Rodríguez-Carrasco, (2019) comprehensively stated, with
regards to corporate administration, union alludes to expanding isomorphism in the
administration practices of open organizations from various nations. As indicated by as of late,
there has been significant debate about both the attractive quality and certainty of combination in
the administration practices of open enterprises.
Drobetz and Momtaz, (2019), Argues that there is a normative consensus which persuading the
corporate guidelines towards the shareholder’ value maximization. In Addition, they also argue
that shareholders maintain the supportive and political consensus in the organizational favour. In
contrast Williams and Conley, (2005) focused on the difficulties while the convergence of CG.
The research of Mario Krenn (2016) studied that changing pattern of world economy forces
economic institutions to adopt the foreign laws and guidelines in order to fit in the local market.
As a result, growing globalization will lead to hybridization instead of convergence.
The trend of carrying corporate governance and ethical framework is growing day by day every
organization has to follow and maintain high standards in order to maintain a safe work

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environment and meet the legal expectations of the society. This trend is growing worldwide and
many countries or their government provides a guideline to carry the corporation government
and provide disclosure about corporate governance. In the disclosure, companies have to show
that they maintain legal obligation and deliver sustainable environment to the society and
communities. As Yoshikawa and Rasheed, (2009) stated that convergence is when two
organizations or countries adopt the same corporate government laws and guidelines. The
research conducted in supporting the statement that it exists as many organizations and countries
having similar policies, for instance, most of the companies are having a policy of corruption and
bribery majority of largest companies support the engagement of its stakeholder while decision
making. In contrast Sarens and Abdolmohammadi, (2011) suggest that these policies vary
according to their actual occurrence of corrupt practice across the countries and claim that there
is no convergence.
When existing establishments do not have the adaptability to react without general change and
legal boundaries limit the limit with regards to general institutional change, an option would be
contracts. Consequently, in any examination of assembly it is imperative to be clear about what
sort of union the report talking about.
Any discussion about convergence is useless until it can be specified that what the objects
involving in the group are converging to For example, Japanese and American administration is
combining could mean various things. In the first place, it could imply that American
administration practices are ending up progressively like Japanese practice. 2nd, it could imply
that Japanese administration is ending up increasingly like American administration. 3rd, it can
imply that both are joining towards the centre between them. At last, it could likewise imply that

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the two frameworks are moving towards some sort of a regularizing perfect that is altogether
diverse from their present situations.
From the above overall discussion, it can be specified that yes convergence exists as many
companies have the majority of laws and regulations making convergence. Also Aguilera and
Jackson, (2003) provide some dimension of convergence that assessed in the empirical studies.
Here is the convergence dimension list of corporate governance:
Institutional level:
1. Adopting better corporate governance
2. Legal reforms and regulatory changes
 Need for the outside directors
 Balanced disclosure
 protection of minority
 Creditors and shareholders
3. Nation level changes
 Spread of CEO option pay
 Presence of partners and investors
Firm level
1. Involvement of outside directors
2. Disclosure about company’s information
3. Implement of executive stock pay

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Part 2
Drivers of convergence
Theories of corporate convergence and diversity are analysed through the punitive perspective of
diverse laws, history, politics, regulations and culture complementarities. There are some
theories given by Judge, Douglas and Kutan, (2008), and stated that convergence exponents
which accentuate efficient market consideration claims that internationalization hastens
competitions over “best practice” and those organizations which are more visible to the
international market are compelled to apply Anglo American Model as it is assumed as
international standard, in contrast, institutional theories carry that organizational field incline to
become isomorphic according to time and this result kind of pressure normative and corrective
and mimetic. These pressures also can be seen in corporate governance as well. For instance, if
an organization form one country accesses the financial market other countries, they have to
make sure that they fill the legal requirement and follows the required rules. This also follows
when an organization form one country start to monitor what they observe to have better
practices of governance into other countries this can be stated as a mimetic procedure. At last the
demand for protection of less powerful stakeholders and disclosure taken with the normative
status and become an important aspect of many countries and industrialization. For instance,
global harmonization of disclosure and standards of accounting promote convergence. Apart
from that, there are other drivers that forces and promote convergence:
Integration of financial markets
Market integration is a significant factor that drives the convergence of governance practices.
According to Aguilera and Cuervo‐Cazurra, (2009) from past some decades, many countries
there are a huge number of organizations which are listing in the stock exchange. The UK and

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US SE have faced a large number of foreign listing as many firms are interested in those
countries SE where the see least demanding legal framework. And this cross border merger and
listing lead to acquiring same governance practices of the country thus leading to convergence of
corporate governance.
Diffusion of Code of conduct and better Governance and harmonization of Accounting
Standards
Markarian, et al, (2007) found another driver of the convergence development of values and code
of Ethics and corporate governance also harmonization of the accounting standard across the
world.
Yoshikawa and Rasheed, (2009) also examined that pressure of regulatory framework forces
companies to diffuse the code of corporate governance in order to sustain ethical framework and
has to provide disclosure so that they can earn the return on investment by implementing better
corporate governance practices and, meet the expectation of many communities.
Sun, et al, (2010), assessed CG system by Legitimacy theory also and stated that organizations
have to be legitimate and in order to be legitimate they have to follow the rules and sustain legal
obligation and operate with the guidelines. Legitimacy also states that the companies have to
provide disclosure about what they are doing internally through their annual disclosure. In return,
they can have a benefit.
Hence organizations from many countries fulfil the requirement of being legitimate as a result
this lead to convergences at a huge level.

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Obstruction of convergence
A better understanding of convergence is not complete without evaluating its critical review
factors that obstruct and play against towards convergence of CG. Apart from the drivers, there
are many impediments of convergence as Yoshikawa and Rasheed, (2009), assessed many forces
push organization form different countries for the corporate governance convergence, National
government system is working and racing against convergence. When changes arise they
evaluated as direct significances of endogenous factors in the nation instead of the outcome of
international factor that pushing for convergence.
Yoshikawa and Rasheed, (2009), provide an example that there Sarbanes-Oxley law in the US
which was a rule for the local community and that response to collapse with the system. Hence
there are also those forces that play against the convergence of CG. With the critical review or
lack of convergence structured as path dependence, complementarities between institutions and
laws, the occurrence of various optima and variances in social norms each of these.
Path dependence
Gordon and Roe, (2004) Describe that Path dependence is a condition where the existing state of
the system is evaluated by its preliminary conditions and also by the path it looks. They stated
that structure driven path dependence may arise out of many factors. 1st, refer to implements that
an organization of one country might have made with debt structure or remuneration policies in
response to diffuse share ownership that leads to lead to make changes in ownership structure
with least efficiency.
Standard driven way reliance emerges from the impact that underlying possession structures
have on consequent structures through their impact on lawful guidelines administering

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partnerships. These legitimate guidelines incorporate corporate law, laws overseeing bankruptcy,
work relations, and budgetary establishments. Strikingly, the guidelines themselves are way
needy. Standards are once in a while authorized for effectiveness reasons and are impacted by
earlier regulations and existing possession structures. For instance, when a lot of principles are
set up and the organizations in that nation have brought about expenses in adjusting to them,
under typical conditions the sunken expenses would be utilized as a rationale in contradiction of
changing the standards.
Complementarities
Gordon and Roe, (2004), assessed that governance practices are basically an outcome of a
system of complementary institution, laws, and guidelines, where improvement of an element
can hurt the efficiency of the whole system. From the institutional perspective effectiveness of
separate practices of governance cannot be examined in the isolation. For instance, with the US
context paying large dividends can be beneficial for the shareholders as this will decrease the
urgency of cash available to leaders, in contrast in Japan cross-shareholding is the legal norm,
and huge dividends can only mean that the organization is only paying a dividend to each other
with no decrement in discretionary cash. Hence it can be nothing seems as convergence.
Conclusion
The convergence of corporate governance is a condition when two countries or organizations
implement. Applying for literature review part 1 focused on evaluating that the convergence of
CG system exists or not and Second part evaluates the argument for and against of convergence
of CG. And adopt the similar practices of corporate governance including laws, policies and
other guidelines. It can be concluded that issue of convergence of CG become academic debate

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some found that there are largest numbers of factors that create convergence, in contrast, some
states that every country has their rules and legal laws according to their culture hence there is no
convergence of such governance practices. Yet the thing which is important is to understand the
procedures that facilitate and prevent convergence of CG system.
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