Corporate Governance Insights Interview Series: Top corporate governance experts report on the latest research in emerging markets.
Colin Mayer is the Peter Moores Professor of Management Studies at the Saïd Business School. He is an Honorary Fellow of Oriel College, Oxford and of St Anne’s College, Oxford. He is an Ordinary Member of the Competition Appeal Tribunal and a Fellow of the European Corporate Governance Institute. Professor Mayer’s book “Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in It” was recently published by Oxford University Press
The most interesting piece on corporate governance I read recently was…
…a paper by Robert Eccles, Ioannis Ioannou and George Serafim that draws a connection between better corporate performance and a strong corporate culture of sustainability. The authors determine that companies that adopt stronger environmental, social and governance policies display significantly superior performance over the long term, as measured by both stock market performance and accounting metrics. The boards of directors of these companies are more likely to be responsible for sustainability, and executive remuneration is more frequently a function of sustainability measures than in other companies. They place greater emphasis on stakeholder engagement, on a long-term orientation, and on the measurement and disclosure of non-financial information.
I think this paper offers the most persuasive evidence to date of the benefits of strong corporate governance, the way in which performance relates to firm governance, and the positive impact of ESG (environmental, social, and governance policies) on the financial performance of companies.
Right now, I am working on…
…Helping emerging market countries understand the role corporations can play in moving people out of poverty and contributing to sustainable, equitable growth, and how the corporate governance approach can either facilitate this or impede it. But it’s not a static thing - you can’t assume that the governance system put in place at one point in time will continue to be effective through the years. The governance system has to change and evolve along with the economy. What once may have been an appropriate mechanism to promote entrepreneurship and business expansion might now be contributing to a system that restricts competition and overlooks minority shareholder rights.
Let’s look at South Korea as an example. One of the reasons for South Korea’s remarkable growth trajectory was the enabling governance environment that allowed family-owned companies to thrive. Today, however, there is growing concern around the concentration of control in a small number of family-owned firms, called chaebols. Issues include the limits to minority shareholder rights and the power of chaebols to stifle competition. In turn, this could be causing economic inefficiency, perhaps contributing to slowed growth. The winning candidate in the country’s recent presidential elections campaigned on prioritizing corporate governance reforms that would limit the influence of the chaebols.
I think the most relevant CG research topic for emerging markets now is…
…matching governance systems to a country’s economic goals, to overall private sector expansion goals AND to the activities and ownership structures of individual corporations. This must be done in a way that is not excessively intrusive and that aligns the interests of large corporations with the public good.
China is facing this situation right now. China’s growth was largely built on the success of its state-owned enterprises. They remain dominant, particularly in several important sectors like banking. And there are concerns about bureaucracy and inefficiency, about inappropriate diversion of resources for political ends, and about corruption. So, something needs to change. But the question is, what’s the best corporate governance model? It’s got to be an approach that takes into account the country context and economic make up.
Viewed through the development lens, policy makers, elected officials and business leaders should treat corporate governance as a critical determinant of economic growth…
…Corporations can be a powerful force for development and growth in emerging markets, with formidable potential for solving some of the world’s most intractable problems. The governance system can be a driver of this powerful force. Or it can stand in the way of positive outcomes. The key is that it should be flexible enough to reflect the diversity of private sector activities in a country.
Let’s compare the UK and the US as a good illustration of the significance of this diversity. In the US, it is much easier for firms to match their corporate governance arrangements to their corporate activities - for example, they can decide to incorporate in states that offer management protections against too much shareholder control and takeover threats, or in states that particularly emphasize shareholder rights. The result is that US corporations have found a more appropriate balance between shareholder control and commitment to other parties than UK firms. These governance conditions in the US have contributed to the success of the US in promoting diverse corporate activities, even as the governance conditions in the UK have factored into the marked decline in its large-scale manufacturing.
This provides an interesting lesson for emerging market nations that are confronting these complexities now.
For further reading, Professor Mayer recommends:
Law, Finance and Economic Growth in China, by Franklin Allen, Juan Qian and Meijun Qian
Presidential Politics in South Korea: Bashing the Big Guys, The Economist, October 13, 2012
View all interviews in this series...