The False Promise of Global Governance Standards
Cambridge – In the wake of last year’s global financial meltdown, there is now widespread recognition that inadequate investor protection can significantly affect how stock markets and economies develop, as well as how individual firms perform. The increased focus on improving corporate governance has produced a demand for reliable standards for evaluating governance in publicly traded companies worldwide. World Bank officials, shareholder advisers, and financial economists have all made considerable efforts to develop such standards.
The notion of a single set of criteria to evaluate the governance of publicly traded firms worldwide is undoubtedly appealing. Both investors and publicly traded firms are operating in increasingly integrated global capital markets. But the quest for a single set of global governance standards is misguided.
Yes, over the last decade, there has been growing use of global governance standards, largely developed in the United States, to assess how countries and companies around the world protect minority investors. But these efforts have overlooked fundamental differences between controlled companies, which have a controlling shareholder, and widely held firms that lack such a controller. While widely held firms dominate the capital markets of the US and the UK, controlled companies dominate in most other countries.